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Can Roe Be Used To Predict Portfolio Performance?

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  • A. F. M. MAINUL AHSAN

Abstract

Return on equity (ROE) is a closely watched financial ratio among equity investors. It is a strong measure of how well the management of a firm creates value for its shareholders. Different financial ratios, for instance, Price-to-Book, Price-to-Earnings, Price-to-Sales, Debt-to-Equity, have been used to predict security performance. This study, using ROE to predict portfolio performance, found that investors can create portfolios based on a simple historical financial ratio, i.e., ROE, which will produce positive abnormal return without extensive cumbersome fundamental research. However, portfolios based on higher ROE do not guarantee higher positive abnormal return. This particular strategy could be very cost-effective in the emerging markets where financial data is not readily accessible.

Suggested Citation

  • A. F. M. Mainul Ahsan, 2013. "Can Roe Be Used To Predict Portfolio Performance?," Journal of Academic Research in Economics, Spiru Haret University, Faculty of Accounting and Financial Management Constanta, vol. 5(1 (June)), pages 5-20.
    • Handle: RePEc:shc:jaresh:v:5:y:2013:i:1:p:5-20
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    Citations

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    Cited by:

    1. Rutkowska-Ziarko Anna, 2015. "The Influence of Profitability Ratios and Company Size on Profitability and Investment Risk in the Capital Market," Folia Oeconomica Stetinensia, Sciendo, vol. 15(1), pages 151-161, June.
    2. Kazuhiko Kobori, 2020. "Effects of Corporate Profitability and Growth on the Shareholding Strategies of Banks: Evidence from Japan," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(9), pages 1-83, September.
    3. Mustafa Cayir & Nasuh Oguzhan Altay, 2021. "Direct and Indirect Effects of Cash Dividend Policies on Firms’ Capital Accumulation in Selected Developed Markets," Istanbul Business Research, Istanbul University Business School, vol. 50(2), pages 235-254, November.
    4. Roxana Manuela Dicu & Ioan-Bogdan Robu & George-Marian Aevoae & Daniela-Neonila Mardiros, 2020. "Rethinking the Role of M&As in Promoting Sustainable Development: Empirical Evidence Regarding the Relation Between the Audit Opinion and the Sustainable Performance of the Romanian Target Companies," Sustainability, MDPI, vol. 12(20), pages 1-17, October.

    More about this item

    Keywords

    ROE; portfolio performance; management; firm; shareholder.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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