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Risk-Based Investing in the German Stock Market

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  • Jan Bastin

Abstract

The article shows properties of risk-based portfolios in the German stock market. Those systematic strategies use different approaches to weight stocks in portfolios. We present theoretical and empirical characteristics of five risk-based equity investments: the equal-weighted, minimum variance, maximum diversification and risk parity (equal risk budgeting and equal risk contribution) portfolios. Risk-based portfolios outperformed the market-cap weighted CDAX index with a lower level of risk in the period 2002-2015. Their excess returns relative to the CDAX index can be explained with Scherer's five-factor model; with Fama-French and low-risk anomaly factors. R2s of different strategies range from 77% to 92%.

Suggested Citation

  • Jan Bastin, 2018. "Risk-Based Investing in the German Stock Market," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(1), pages 55-72.
    • Handle: RePEc:prg:jnlpep:v:2018:y:2018:i:1:id:643:p:55-72
    DOI: 10.18267/j.pep.643
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    References listed on IDEAS

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    1. Jan Bastin, . "Minimum Variance Portfolios in the German Stock Market," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-18.
    2. Blitz, D.C. & van Vliet, P., 2007. "The Volatility Effect: Lower Risk without Lower Return," ERIM Report Series Research in Management ERS-2007-044-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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    More about this item

    Keywords

    risk-based portfolio; German stock market; CDAX index; risk; returns; multifactor model;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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