IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v19y2018i2d10.1057_s41260-017-0050-y.html
   My bibliography  Save this article

“Safe” stocks

Author

Listed:
  • Wai Mun Fong

    (National University of Singapore)

Abstract

We define “safe stocks” as those that have the characteristics of low market betas, high Sharpe ratios and low tail risk compared to the market portfolio. A profitable dividend yield (PDY) portfolio formed by combining stocks with high gross profitability with high dividend yield possesses all of these features. Despite their low betas, PDY portfolios have outstanding Sharpe ratios, more positive skewness and lower kurtosis in their returns than the market. Furthermore, an index of market-wide tail risk based on pseudo-bonds credit spreads loads negatively on the market’s returns but has no significant effects on PDY portfolio returns, suggesting that PDY portfolios come close to the ideal of a safe asset as defined in this paper.

Suggested Citation

  • Wai Mun Fong, 2018. "“Safe” stocks," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 93-98, March.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0050-y
    DOI: 10.1057/s41260-017-0050-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-017-0050-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-017-0050-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:53:y:1998:i:6:p:2029-2057 is not listed on IDEAS
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    4. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    5. Fuller, Kathleen P. & Goldstein, Michael A., 2011. "Do dividends matter more in declining markets?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 457-473, June.
    6. Jegadeesh, Narasimhan, 1990. "Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-898, July.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Firm profitability and expected stock returns: Evidence from Latin America," Research in International Business and Finance, Elsevier, vol. 51(C).
    2. Chris Godfrey & Chris Brooks, 2015. "The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story," ICMA Centre Discussion Papers in Finance icma-dp2015-07, Henley Business School, University of Reading.
    3. Lou, Dong & Polk, Christopher & Skouras, Spyros, 2019. "A tug of war: Overnight versus intraday expected returns," Journal of Financial Economics, Elsevier, vol. 134(1), pages 192-213.
    4. Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2021. "Anomalies in the China A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    5. Weber, Martin & Jacobs, Heiko & Regele, Tobias, 2015. "Expected Skewness and Momentum," CEPR Discussion Papers 10601, C.E.P.R. Discussion Papers.
    6. Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2022. "The Distress Anomaly is Deeper than You Think: Evidence from Stocks and Bonds [The prediction of corporate bankruptcy: a discriminant analysis]," Review of Finance, European Finance Association, vol. 26(2), pages 355-405.
    7. Assaf Eisdorfer & Efdal Ulas Misirli, 2020. "Distressed Stocks in Distressed Times," Management Science, INFORMS, vol. 66(6), pages 2452-2473, June.
    8. Pavel Bandarchuk & Jens Hilscher, 2013. "Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics," Review of Finance, European Finance Association, vol. 17(2), pages 809-845.
    9. Joachim Freyberger & Andreas Neuhierl & Michael Weber, 2020. "Dissecting Characteristics Nonparametrically," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2326-2377.
    10. Balakrishnan, Karthik & Shivakumar, Lakshmanan & Taori, Peeyush, 2021. "Analysts’ estimates of the cost of equity capital," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    11. Hiroki, Takashi & Iwatsubo, Kentaro & Watkins, Clinton, 2022. "Does firm-level productivity predict stock returns?," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    12. Hou, Kewei & Xue, Chen & Zhang, Lu, 2017. "Replicating Anomalies," Working Paper Series 2017-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    13. Ma, Yao & Yang, Baochen & Li, Jinyong & Shen, Yue, 2023. "Trend information and cross-sectional returns: The role of analysts," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    14. Lim, Bryan & Sotes-Paladino, Juan & Wang, George Jiaguo & Yao, Yaqiong, 2024. "The value of growth: Changes in profitability and future stock returns," Journal of Banking & Finance, Elsevier, vol. 158(C).
    15. Choi, Jaewon & Kim, Yongjun, 2018. "Anomalies and market (dis)integration," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 16-34.
    16. Bai, Jennie & Bali, Turan G. & Wen, Quan, 2021. "Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1017-1037.
    17. Chou, Pin-Huang & Ko, Kuan-Cheng & Rhee, S. Ghon, 2023. "Comparing competing factor and characteristics models: Evidence in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    18. Mamdouh Medhat & Maik Schmeling, 2022. "Short-term Momentum," The Review of Financial Studies, Society for Financial Studies, vol. 35(3), pages 1480-1526.
    19. Pätäri, Eero & Karell, Ville & Luukka, Pasi & Yeomans, Julian S, 2018. "Comparison of the multicriteria decision-making methods for equity portfolio selection: The U.S. evidence," European Journal of Operational Research, Elsevier, vol. 265(2), pages 655-672.
    20. John Cotter & Niall McGeever, 2018. "Are equity market anomalies disappearing? Evidence from the U.K," Working Papers 201804, Geary Institute, University College Dublin.

    More about this item

    Keywords

    Gross profitability; Dividend yield; Profitable dividend yield strategy; Pseudo-bonds; Option-based credit spreads;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0050-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.