Mechanical Investment Strategies: A Quantitative Study of Actively Managed Mutual Funds Using Investment Strategies Aiming to Eliminate Psychological Biases
Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
The purpose of this thesis is to conduct a study of the performance of mutal funds, which use investment strategies aiming to eliminate psychological biases, here referred to as mechanical investment strategies. The managers of these funds assume that they, with a high element of quantitative methods, will be able to systematically pick stocks, which are undervalued according to the Efficient Market Hypothesis (EMH), i.e. stocks that not yet have been efficiently priced in the market by other investors. We have empirically tested and compared the performance of mechanical mutual funds with that of the market and of regular mutual funds. In order to test the performance, we have used three different measures: the Treynor Index, the Sharpe Ratio and Jensen’s Alpha. The discussion surrounding the study is carried out in the context of theories, such as the EMH and Behavioral Finance. The results of the study show that the mechanical funds on average were not able to outperform either the market or the regular funds. This indicates that mechanical strategies are not superior. Further, this suggests that the EMH might be questioned as the most valid theory in describing market movements.
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IdentifiersURN: urn:nbn:se:su:diva-3461OAI: oai:DiVA.org:su-3461DiVA: diva2:192756