Assignment Business Case:

Is there a long term effect of following buy recommendations on TV?

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I.
Introduction & summary
In the below brief study I would like to focus on the question if the buy recommendations of
the Dutch TV-program Business Case have a positive long-term effect compared to the
Dutch stock market. It is quite interesting to analyze not only the short-term effect usually
expected following such television recommendations but to actually extend the data
collection horizon and follow the hypothetical investment portfolio based on Business Case
recommendation over a longer investment period.
In this case I would like to present the findings of the evaluation of five investment portfolios
which are entirely based on the Business Case recommendations and are held for 50 up to
250 days.
II.

Theoretical approach and data set

Based on the given data set related to the excess returns of each of the recommended
portfolios from September 5, 2004 until January 30, 2011 in relation to the excess of the
Dutch market return three regression models are being analyzed. Firstly, a capital asset
pricing model based regression is being estimated and the findings for each investment
horizon are being compared with regards to the size and significance of the estimates. An
outcome supporting the opening thesis of the positive long-term effect requires the following
conditions: Alpha (intercept) of the regression needs to be larger than zero and significant at
95% confidence chosen in the analysis. Furthermore, the Beta estimate is being verified on
its correlation with the market, hence we test the hypothesis if Beta is unequal to one.
In the following stage I extend the CAPM model by the three-factor Fama-French model
including the SMB and HML factors into the regression. The SMB (small minus big) factor is
related to the amount of risk associated with the smaller market capitalization firms vs. bigger
ones. The HML (high minus low) factor in the Fama-French model shows the relative
difference between the returns of high book-to-market value firm versus low book-to-market
value firms. Both factors are being tested in the hypothesis testing if they are larger than zero
and significant in order to explain their effect on the portfolio performance.

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In the last part a regression model is being extended with the momentum factor (MOM) to
construct a four-factor model for each of the portfolios and analyze in what extend this most
advanced model supports the estimation of the long-term wealth effect of the recommended
portfolios.
III.

Summary of the results of the CAPM regression with 50-250 days investment
horizon.

Table 1 CAPM model

The conclusion of the above long-term analysis of the portfolio based on the
recommendation of the 'Business Class" analysts and the gathered data only shows for the
CAPM regression model, that for the Portfolios of 150, 200 and 250 days the Alpha intercept
is positive and significant (t-value > 1.96 with 95% confidence). The conclusion is based
solely on the underlying data without considering other factors such as costs. With regard to
the Beta value, the test result show that it is significantly different than 1 and that it is less
risky than the Dutch market portfolio. Furthermore with the pass of the time, the R squared
value (coefficient of determination) increases, meaning that the higher percentage of the
excess return is explained by the regression model. We may conclude that the portfolio
based on the Business Class recommendation outperforms the market in the long term, not
considering other external factors.

IV.

Summary of the results of the three-factor Fama French model with 50-250 days
investment horizon.

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Table 2 Fama-French model

The time-series regression based on Fama and French includes additional factors in the
regression: the SMB and HML factors which ought to add to the explanation of the excess
returns of the portfolio by adding the size factor (SMB) and the book-to-market factor (HML)
into the regression (Fama and French, 2014) as below:
RitRFt = ai + bi (RMt RFt) + si SMBt + hi HMLt + eit.
The above Fama-French model allows to draw a conclusion that the recommended stocks
portfolio kept for 150, 200 and 250 days performs better than the market because the Alpha
is positive and significant (t-value > 1.96 with 95% confidence). The Beta value is
significantly different than 1 and shows that on a long term the recommended portfolio is less
risky than the Dutch market. The R squared increases value with time confirming that on a
long term the model explains higher percentage of excess returns of the portfolio. By adding
the SMB and HML factors into the regression, we may conclude that the SMB value is
significant and above 0 implying that the portfolio has more risk associated with the one of
smaller market capitalization firms, while the HML factor is significant only in one case of 150
days horizon with other terms being not significantly different than 0 hence the impact on the
excess returns may not be concluded. Overall we may summarize that the portfolio based
on the Business Class recommendation and containing more small firms risk outperforms the
market in the long term, not considering other external factors.

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V.

Summary of the results of the four-factor model (FFM + Mom) with 50-250 days
investment horizon.

Table 3 Four-factor model (FFM+mom)

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After combining all of the four factors to the regression model, we may conclude that the
portfolio based on the recommended stocks by the Business Class does outperform the
market on the long-run as the Alpha intercept is positive and significant for portfolios kept
150, 200 and 250 days. The Beta value is significantly different than 1 and shows that on a
long term the recommended portfolio is less risky than the Dutch market. The R squared
increases value with time confirming that on a long term the model explains higher
percentage of variability of the excess returns of the portfolio. After combining all four factors
in the regression model we observe that the SMB value is significant and above 0 implying
that the portfolio has more risk associated with the one of smaller market capitalization firms
which outperform bigger firms. The HML factor in this model is positive and significant in four
cases (100, 150, 200 and 250days) confirming that high book-to-market value stocks
contribute positively to the excess returns of the portfolio. The momentum factor added to
the regression is positive in four cases, however it is not significant in this model, hence we
may not conclude the impact of the momentum effect in this particular case. Overall we may
summarize that the portfolio based on the Business Class recommendation outperforms the
market in the long term, not considering other external factors such as costs in the equation.
Furthermore the application of the three regression models lets us conclude that the fourfactor model presents the most accurately the long-term impact of the SMB and HML factors
on the excess returns of the portfolio due to the significance of the estimates in our case.

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References (in addition to the case data):

Fama, E., French, K. (2014). September 2014 A Five-Factor Asset Pricing Model.

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