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.