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Quality minus junk : predicting wealth generating stocks with quality minus junk

Erstad, Aslak Holm; Lorentzen, Kristian Andreassen
Master thesis
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URI
https://hdl.handle.net/11250/2767271
Date
2021
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  • Master Thesis [4657]
Abstract
In this thesis, we investigate if the quality minus junk (QMJ) factor can be used to predict

the stocks responsible for the excess wealth creation in the US. We find that quality

has a low predictive power on next months wealth generating stocks. Our findings do

suggest that investors can benefit in terms of risk-adjusted returns if they use quality to

predict portfolios of wealth generating stocks and portfolios of wealth destroying stocks.

A predicted QMJ factor that buys and sells these high and low portfolios does not provide

any additional compensation for risk over the original QMJ factor, unless investors are

willing to weight the stocks equally. We also find that quality portfolios of stocks that

are considered wealth generating and wealth destroying differs in quality, and that this

difference also increases over time.

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