Investment performance comparison among various portfolio selection strategies in Taiwan stock market

Abstract

This comparative analysis of the investment performance of eight portfolio strategies in the Taiwan stock market utilizes monthly data from Taiwan-listed companies from 1990 to 2021; the portfolio for each year comprises the top 100 companies based on market capitalization. Setting aside the equally and value-weighted portfolio strategies, the six strategies remaining are grounded in the mean-variance framework, fundamental index model, predictive blends model, and single-index model, respectively. Employing the rolling-window method, we compute the following monthly out-of-sample performance metrics for the portfolios: average excess return, standard deviation, Sharpe ratio, certainty equivalent return (CER), single-year cumulative returns, and value-at-risk. Portfolio weights are determined using a five-year estimation period and remain fixed (buy and hold) during the sixth year. In addition to scrutinizing the portfolios’ performance on a yearly basis, we also assess their cumulative long-term performance over multiple years. We investigate the impact of stock market fluctuations on various investment strategies, considering periods of boom and bust as a test of robustness. We posit here that CER, rather than the Sharpe ratio, is a suitable performance measurement index. We further explore the influence of portfolio diversification on investment performance. Generally, our findings suggest an inverse relationship between investment performance and the HHI, indicating that diversification tends to enhance investment performance while mitigating investment risk.