Hassan Zada, Arshad Hassan, Muhammad Zeb Khan, Mustafa Afeef


The study is based on two main objectives. First, it aims to identify a portfolio of stocks as the most appropriate investment portfolio (AIP) for investors, specifically in the context of Pakistan. Second, this research intends to identify the characteristics of the portfolio which forms AIP. For this purpose, the researcher has formed sixteen time series portfolios, using Fama and French five factor model (2015). Beside marker factor, four risk factors have been constructed which include SMB, HML, RMW, and CMA. The results show that five portfolios which are BHRA, BLRA, BLRC, BHRC, and SHRA are appropriate investment portfolios for investors in Pakistan. Amongst these portfolios, BHRA earns highest monthly average returns of 1.17% having standard deviation of 9.13%, followed by BLRA with average monthly returns of 1.05% with standard deviation of 7.59%.  The average return of BHRA is 11.4% higher than BLRA, whereas standard deviation of BHRA is almost 20% larger than the standard deviation of BLRA. Both, the average per month return and risk of BHRA are highest amongst all higher returns portfolios. Contrarily, the excess return of BLRA is not considerably low from BHRA but the incremental risk per unit return of BHRA is almost double of BLRA. Therefore, amongst all five appropriate portfolios, BLRA is justifiably the most appropriate investment portfolio which has the highest adjusted R-square of 77.106 %, the highest average returns of 1.053 % per month, and minimum risk of 7.5%.  The results, therefore, suggests all investors to include big, low book/market, robust profitable, and aggressive investment stocks in their portfolios to earn above average returns with minimum risk.

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