Optimal bets in oil-related stocks: a quantitative approach
Abstract
This thesis examines how implied cost of equity from fundamental valuations
affect optimal allocation for a marginal investor, net of costs. We find Black-
Litterman long-only restricted portfolio incorporating implied cost of equity
outperform peer-group benchmark by 0.22 larger monthly information ratio.
Moreover, a non-short restricted portfolio constructed on implied earnings
yield outperform peer-group index by 0.12 larger monthly information ratio.
Simple historic allocation models with and without covariance shrinkage
perform poorly and get outperformed by peer-index in the non-short restricted
case by 0.10 and 0.64 larger monthly information ratio, respectively.