The Magic Formula : An empirical study of Joel Greenblatt's magic formula, backtested on the Oslo Stock Exchange
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- Master Thesis 
This study analyzes the performance of Joel Greenblatt's magic formula on the Oslo Stock Exchange from May 2003 to May 2022. The investment strategy involves ranking stocks based on their earnings yield and return on capital. We employ the four-factor model of Fama and French (1993) and Carhart (1997) to measure the strategy's alpha. Our results indicate that the magic formula generates risk-adjusted excess, with a monthly alpha of 0.5% over the sample period, statistically significant at the p < 0.05 level. Additionally, it outperforms the OSEAX by 8.02 percentage points in compound annual growth rate and has a Sharpe ratio of 44 decimal points higher. However, when implementing transaction costs, the alpha is only significant at the p < 0.l level, suggesting that risk-adjusted excess returns are not achievable in real-world conditions.