5) Can we build a zero investment portfolio based on analyzed risk factors?
4) creating an adequate zero investment portfolio that fully reflects the influence of particular risk factor on equity risk premiums,
Based on these returns we created cumulative returns for HML and then LMH zero investment portfolio.
Similarly, based on these returns we created cumulative returns for SMB and then a BMS zero investment portfolio.
The difference of returns of these extreme decile groups is calculated again for each weekly interval and based on that we create cumulative returns for WML and then an LMH zero investment portfolio.
3) we can build a zero investment portfolio with positive alpha based on analyzed risk factors.
From our hypothesis, the expected return of a zero investment portfolio that shorts stocks with low IDVOL betas and buys stocks with high ]DVOL betas should be negative.
Zero investment portfolios that long the highest 20% of IDVOL beta stocks and short lowest 20% of IDVOL beta stocks have abnormal returns of about -0.27% per month.
When we construct our zero investment portfolios, the RIDVOL of the long and short sides of the portfolio will be equal and their dispersion in the zero investment portfolios will be neutralized.
We use the quintile portfolios and the two zero investment portfolios, [(H - L) and (H + 4) - (2 + L)/2], in these tests.
All eight of the zero investment portfolios are negative and significant, consistent with Ang et al.
Zero investment portfolios
are equivalent in the model to taking a long (short) position in the positively screened equal-weighted portfolio, and taking a short (long) position in the negatively screened equally-weighted portfolio.