Commodity Trading Advisors (CTAs) have gained popularity due to their abilities to generate an absolute return strategy. Little is known about how CTAs work and what variables are important to tune in order to create a profitable strategy. Some investors use CTA-like strategies to leverage their portfolio and create positive returns in times when the spot market is falling. The report is written for Skandinaviska Enskilda Banken and aims to give the bank and readers an understanding on how changes of parameters in a CTA strategy change the outcome of it with focus on three main measurements: Sharpe ratio, drawdown and total return.  The foundation of CTAs is that they rely on signals from some given sets of assets and make investments decisions solely based on them. CTAs can be rule-based with a binomial signal, or they can use a continual signal, like in the report. The thesis aims to recreate a CTA using a continuous momentum signal and with the signal, invest accordingly. Some different variables were tested, most importantly the report focuses on the weights of the assets and investigates if the momentum signal is good as it is or if a risk parity weighting is needed on top of the signal in order to generate a return that matches the expectations of a low drawdown and a high Sharpe ratio.  Beyond the weight allocation, different lookback periods of both the signal and weight were tested. A shorter lookback generated a quicker return that was more sensible to short trends on the market. Which in some cases was profitable but it also lost more of it accumulated return when the trend was "false". The equally weighted signal that only takes the trend into account when allocating the weights of the assets was more volatile it its returns and benefited from a long signal. The CTA results presented can only be seen as an index since it is rebalanced every rebalancing point, the frequency of those points was examined and the strategy was performing well if rebalanced once a week or once a month, every day and once a year did not yield a better result.  As expected, the CTA benefits from trend on the market, no matter the direction of it. The best periods for the CTA were when the market was very volatile, mainly 2008 and 2022. When there is no clear trend, the CTA reacts too slowly and often loses money. One important conclusion is that the CTA never should be used as an investment strategy on its own, rather as a hedging strategy that allocates a fraction of a total long-only portfolio.

This dissertation consists of three essays. The first essay studies the impact of indexing on stock price efficiency. Indexing has experienced substantial growth over the last two decades because it is an effective way of holding a diversified portfolio while minimizing trading costs and taxes. In this paper, we focus on one negative externality of indexing: the effect on efficiency of stock prices. Based on a sample of large and liquid U.S. stocks, we find that greater indexing leads to less efficient stock prices, as indicated by stronger post-earnings-announcement drift, greater deviations of stock prices from the random walk and greater return predictability from lagged order imbalances. We conjecture that reduced incentives for information acquisition and arbitrage induced by indexing are probably the main cause of the degradation in price efficiency, but we find no evidence supporting a direct impact from passive trading or any effect through liquidity. The second essay investigates the effect of price inefficiency on idiosyncratic risk and stock returns. I finds that price inefficiency in individual stocks contributes to expected idiosyncratic volatility. If idiosyncratic risk is priced, greater price inefficiency could be associated with higher expected returns. Consistent with this hypothesis, this paper then finds a positive relation between price inefficiency and future stock returns. This return premium of price inefficiency is not explained by traditional risk factors, illiquidity, or transactions costs. It is also evidently different from the return bias related to Jensen's inequality. This paper thus provides new insights about the determinants of expected stock returns, and new supporting evidence that idiosyncratic risk is priced. The third essay examines whether the upward return bias generated by Jensen's inequality could lead to better performance of equally-weighted (EW) indexes than value-weighted (VW) index when stock prices are not fully efficient. We find that, for a wide range of U.S. stock indexes, EW indexes deliver better four-factor adjusted returns than VW ones do even after deducting transaction costs. Consistent with our hypothesis that the outperformance of EW indexes comes from mispricing, we find that this outperformance concentrates in stocks with greater mispricing, as measured by deviation of stock prices from random walk. Findings in this essay not only imply a potentially winning investment strategy, but also provide new insight into a long-term debate on causes of the outperformance of the EW indexes. / Ph. D.

Most indexes use a cap-weighted strategy as the asset allocation method. Many researchers suggest that although the cap-weighted strategy often serves as an appropriate surrogate to the market portfolio, it cannot consistently outperform other portfolio weighting strategies. The main reasons behind it would be related to the market movement and the underlying volatility. It is possible to narrow down the scope of the research by focusing on an industry index as was done in this research. The focus would be on the mining index of Indonesia. Comparisons will be done between the established index to other portfolio weighting schemes, namely the equally weighted portfolio and the minimum variance portfolio. The results of the research was that the index was not quite efficient, both on the returns and the Sharpe or information ratio aspect. There are many possible reasons behind this, but the most possible reasons would be that the stocks included do not contribute to diversification, over focus on the coal industry, lack of rebalancing or restructuring, in addition to the market itself. The implication of this research would be that stock exclusion might also contribute to risk minimization.

Subject background and discussion: In recent decades, issues of human rights, labor and environmental change has been hot topics world wide, which also has influenced the financial market. More and more investors use socially responsible investing (SRI) screens when constructing their portfolios. One form of SRI screen is to choose companies that have satisfied employees. Existing theory says that employee satisfaction is an intangible asset to the firm that will positively affect a firm’s performance in the future. Intangible assets are often unrecognized by the market and thereby not incorporated in the stock price. The efficient market hypothesis has been studied and debated for several decades. Proponents of the EMH argue that all available information is incorporated in the stock price, thus it is not possible to systematically beat the market. However, EMH is controversial, since research has shown different results regarding the possibility to make abnormal return from various investing strategy. Research question: Is it possible to make abnormal returns by investing in a portfolio of worldwide firms with top scores on the SRI screen employee satisfaction? Purpose: The main purpose of this study is to examine investor’s possibility to make abnormal return with controls for multiple risk factors by investing in worldwide firms with top scores in employee satisfaction. One sub-purpose is to examine how the market values intangibles depending on the degree of market efficiency. Another sub-purpose of the study is to test two different portfolio weighting methodologies, equally- and value weighted, and observe the differences between them. Theory: This study deals with the efficient market hypothesis and the concepts of SRI, employee satisfaction, intangible assets and several risk-adjusted measurements. Method: We have chosen to perform a quantitative study with a deductive approach to answer our research question. We used a sample size of 696 firms based on “Great Place to Works”- lists of companies with high employee satisfaction to construct sex portfolios with different holding periods and strategies. These portfolios have been explored and tested significantly with both equally and value weighted methods. Result/Analysis: The study finds significant evidence of an average annual abnormal return of 3,66% and 2,43% for our main portfolio over the market for equally- and value weighted, respectively, using the three-factor model. When adjusting for momentum, thus employing the four-factor model, all the predictive variables still identify strong persistence in the abnormal return, with statistical significance. Conclusion: The results show that it is possible to make abnormal returns, during the observed time period, regardless of the weighing methodology, although the equally weighted received higher abnormal returns. Thus, the market efficiency appears to be in weak form and does not fully value intangibles.

In this paper, market participants’ tendency to form investor herds in the stocks listed on Nasdaq First North Growth Market of Sweden is examined for the period from 2018 to 2023. The models used in this study to detect herd behavior in stocks consist of two measures of dispersions, Cross-Sectional Standard Deviation of returns (CSSD) and Cross-Sectional Absolute Deviation of returns (CSAD), which were proposed by Christie and Huang (1995) and Chang, et al. (2000), respectively. An equally-weighted index consisting of all of the stocks that have traded on this market during the period is created and a quantitative analysis is conducted. Evidence showed absence of herd behavior when using both models, as well as when accounting for robustness tests consisting of small, mid-and large cap portfolios. Our results also support the prediction of rational asset pricing models, which suggest that stock return dispersions around the market returns increase during periods of market stress.