COMPARATIVE ANALYSIS OF PORTFOLIO RETURN WITH LOG - LINEAR PRESENT VALUE MODEL AND FAMA-FRENCH MODEL
Ardie Nirvansyah
Universitas Indonesia
Abstract
Expected returns are a central input in asset allocation decisions and understanding the drivers of expected-returns variations has been coined the “central organizing question” in modern empirical asset pricing research (Cochrane, 2011). Log-Linear Present Value (LPV) framework offers a more parsimonious accounting-based approach for the estimation of expected returns across international markets. This paper will compare how optimal portfolio can be made based off LPV framework which will be compared to the more established Fama-French Five Factors model. The research uses sample of stocks in Indonesian Stock Exchange with observation period of five years, starting from November 2014. Portfolio was formed from selection of 50 stocks using Sharpe ratio as proxy for optimal reward-to-risk ratio. The research finding suggests that Fama French Five Factors model shows superior portfolio.
Keywords: Optimal Portfolio, Log-Linear Present Value, Fama-Frnehc
Topic: Finance