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

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.