Using a simple risk-adjusted stock portfolio, can you compare how well your portfolio would perform if you were to invest in the equity indexes of the world’s largest companies? And, if you can’t afford to invest in the global stock indexes, what alternatives do you have?
During the outbreak period of the COVID-19 pandemic, global stock indexes and financial markets experienced high volatility. The worst stock market declines occurred in the United States and Europe. In contrast, Asia has witnessed less volatility. These results suggest that the effects of the pandemic on the global stock market are not the same for all countries.
A wide body of literature has studied the effects of COVID-19 on the financial markets. However, most of the studies on the impact of the pandemic are based on a short period of analysis. A significant amount of research has focused on investor sentiment driven by the outbreak. The goal of this paper is to evaluate the extent of the pandemic’s effect on selected global stock indexes. The study utilizes a sample of 18 stock indices from the countries that were most affected by the outbreak. These were selected based on Worldometers reports.
The analysis of the effects of the pandemic on stock market returns is conducted using an event study. The study uses 80 trading days from January 1, 2020 to March 31, 2020.
Trend line and retracement support levels have been breached
During the past two months, the global stock indexes have pushed aggressively through both trend line and retracement support levels. This is a sign that markets could be pushed back toward resistance levels from the first quarter bear markets. This would be a negative theme for the global stock markets in 2020.
In March, global stock markets experienced a violent bear market sell-off. This was the worst performance since 2008, during the COVID-19 pandemic. Since then, the indexes have retraced through key swing lows from 2016, 2014, and 2012, and have moved through parallel rising channels. The indexes have regained momentum since late April, and are preparing for an aggressive rebound.
However, longer-term bearish damage has made it unlikely that the S&P 500 will challenge 3,394.9 in June. This would be a retest of the bear move lows from March 2020. It would also require a V-shaped recovery for the stock market to move aggressively toward new all-time highs.
Comparing risk-adjusted stock portfolios with equity indexes
Having an idea of what a risk-adjusted return is can help investors and financial analysts to make better investment decisions. For example, it can help you decide if you should make a purchase of a particular stock or exchange-traded fund (ETF). If you are in the market for a new investment, you will probably want to consider a risk-adjusted portfolio to minimize losses in the event of market downturns.
There are a number of risk-adjusted performance metrics that you can use to compare stock portfolios and indexes. One such measure is the infamous Sharpe ratio, which is the ratio of an investment’s return to its standard deviation.
The other notable measure is the Treynor ratio, which is the excess return over a risk-free investment. Developed by American economist Jack L. Treynor, the aforementioned ratio is considered the gold standard when it comes to comparing risk-adjusted returns.
Another measure of interest is the Modigliani-Modigliani measure, which is a mathematical formula used to determine an investment’s risk-adjusted return. Also known as the M2 measure, it is a good way to see how risky an investment is.
Optimal hedge ratios exhibit huge downward swings during most crises’ episodes
Optimal hedge ratios are one of the most interesting and dynamic indicators of hedging effectiveness, which show large and time-varying patterns during financial crises. They indicate that a long position in a risky asset is hedged by a short position in a safe haven asset. Optimal hedge ratios also show how the optimal weights of equities in a global portfolio may change during financial crises. This paper examines the optimal hedge strategies for stock portfolios in four aggregate stock market indexes. The analysis also looks at the defensive properties of the Swiss Franc.
The optimal hedge ratios for Swiss Franc hedged stock portfolios are consistently negative. They range from -0.210 for European stocks to -0.383 for Emerging Markets stocks. These results confirm the superiority of Swiss Franc over gold as a defensive asset for stock portfolios based on major global equity indexes. The study relies on monthly data from January 1999 to July 2021. This data set provides a large number of observations for a comprehensive analysis.