PERFORMANCE OF DIA AND FORWARD-LOOKING OPTIMAL PORTFOLIOS OF DOW STOCKS

Abstract

Purpose- This paper compares the performance of DIA, trailing optimal portfolio and forward-looking optimal portfolio constructed from a pool of DOW stocks, applying a modified contrarian portfolio construction to the forward-looking optimization. The modified contrarian optimization of this study is based on the premise that loser stocks, in the short run, would have reversal performance and become winner stocks in the short-run future. The investigative question is: Do forward-looking optimal portfolios of DOW stocks perform better than trailing optimal portfolios of DOW stocks in the short run after DJIA hit the year's lowest point in 2022? Methodology- To answer the investigative question, this study compares the short-run performance of forward-looking optimal portfolios with the performance of trailing optimal portfolios. Elton, Gruber, and Padberg (1987) originally introduced the optimal portfolio technique. Findings- The primary focus was on the case related to September 30, 2022, when DJIA hit the lowest level in 2022. To get the trend analysis of the cases of DJIA hitting the lowest level of the year, this study examined two comparable findings, having examined the performance properties of trailing vs. forward-looking optimal portfolios using the same method. One examined the case related to March 23, 2020, and another examined the case related to December 24, 2018. It finds a robust performance of DIA compared to the performance of two forms of optimal portfolios. It also finds that forward-looking optimal portfolios performed better than trailing optimal portfolios regarding the average performance of three cases. Conclusion- It concludes the potential usefulness of DIA as evidence of the market efficiency of DOW stocks. At the same time, forward-looking optimal portfolios for short-run investment in DOW stocks are a viable alternative to investing in the DIA.

Keywords

• Portfolio choice
• portfolio optimization
• event studies
• DIA
• DOW stocks

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