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CAN ROE BE USED TO PREDICT PORTFOLIO PERFORMANCE?

CAN ROE BE USED TO PREDICT PORTFOLIO PERFORMANCE? Return on equity (ROE) is a closely watched financial ratio among equity investors. It is a strong measure of how well the management of a firm creates value for its shareholders. Different financial ratios, for instance, Price-to- Book, Price-to-Earnings, Price-to-Sales, Debt-to-Equity, have been used to predict security performance. This study, using ROE to predict portfolio performance, found that investors can create portfolios based on a simple historical financial ratio, i.e., ROE, which will produce positive abnormal return without extensive cumbersome fundamental research. However, portfolios based on higher ROE do not guarantee higher positive abnormal return. This particular strategy could be very cost-effective in the emerging markets where financial data is not readily accessible. JEL Classification: G11 Keywords: ROE, portfolio performance, management, firm, shareholder http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics, Management, and Financial Markets Addleton Academic Publishers

CAN ROE BE USED TO PREDICT PORTFOLIO PERFORMANCE?

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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
1842-3191
eISSN
1938-212X
Publisher site
See Article on Publisher Site

Abstract

Return on equity (ROE) is a closely watched financial ratio among equity investors. It is a strong measure of how well the management of a firm creates value for its shareholders. Different financial ratios, for instance, Price-to- Book, Price-to-Earnings, Price-to-Sales, Debt-to-Equity, have been used to predict security performance. This study, using ROE to predict portfolio performance, found that investors can create portfolios based on a simple historical financial ratio, i.e., ROE, which will produce positive abnormal return without extensive cumbersome fundamental research. However, portfolios based on higher ROE do not guarantee higher positive abnormal return. This particular strategy could be very cost-effective in the emerging markets where financial data is not readily accessible. JEL Classification: G11 Keywords: ROE, portfolio performance, management, firm, shareholder

Journal

Economics, Management, and Financial MarketsAddleton Academic Publishers

Published: Jan 1, 2014

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