Abnormal returns on the Johannesburg Stock Exchange : alpha as an investment style

Abstract

While alpha is one of the most common indicators by which the performance of investment portfolios are measured little has been studied on its properties in relation to individual shares. Using the ‘style engine’ the study followed a portfolio based approach to evaluating alpha (as measured at share level) as an investment style on the JSE. Five equally weighted portfolios were constructed based on the alpha level displayed by shares under two different models for expected return: A JSE twelve factor model and the Fama-French five factor model. Individual portfolio performance was presented in a graphical time-series format and results were interpreted visually though the construction of price relatives as well as statistically at a significance level of 0.05. The results showed that the effectiveness of an alpha investment style relied to a large degree on the model for expected return from which alpha was derived. Nevertheless, significant underperformance in relation to the market was observed in the lowest quintile portfolios under both models for expected return.