The Case for ROE: A Fundamentals Based Portfolio Weighting Model for Healthcare Stocks

Title

The Case for ROE: A Fundamentals Based Portfolio Weighting Model for Healthcare Stocks

Authors

Presenter(s)

Chase R Dollar

Files

Description

Based on the studies of Eugene Fama, Cliff Asness, Robert Novy-Marx and others, profitability is considered a predictor of stock returns. In this study, using Return on Equity (ROE) as the measure of profitability, I develop a portfolio weighting model for stocks in the Healthcare sector (XLV). Assuming positive covariance between ROE and stock returns, I develop two concentrated portfolios of Healthcare stocks, one with 10 stocks and the other with 20 stocks. Portfolio weights are based on ROE i.e. with higher ROE stocks getting higher weights. Returns are calculated for each portfolio over the years 2011-2016 on both a buy and hold and rebalanced basis. The hypothesis to be tested is that the ROE weighted portfolios outperform the market cap weighted Healthcare sector portfolio (XLV) as well as the S&P500 index of stocks (SPY).

Publication Date

4-5-2017

Project Designation

Independent Research - Undergraduate

Primary Advisor

Trevor C Collier

Primary Advisor's Department

Economics and Finance

Keywords

Stander Symposium poster

The Case for ROE: A Fundamentals Based Portfolio Weighting Model for Healthcare Stocks

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