Comparing Return, Risk, and Efficiency between Portfolios using the Value Investing Approach and Equity Mutual Funds

Abstract

This paper aims to study return, risk and efficiency between 2 asset groups. The first group, we build stock portfolio using Magic Formula which an investment technique that uses the principles of value investing. The second group, we pick 40 mutual funds which have similar principle. And then finding mean, return of investment, standard deviation and shape ratio for each group to test the hypothesis and describe differences in data by using T-test at 95 percent confidence interval. The study found that stock portfolio using value investing approach had a higher rate of investment return when compared to equity mutual fund however equity mutual fund had a lower risk with the level of significance at 0.05. On the other hand, equity mutual fund had a higher efficiency than stock portfolio using value investing approach with the level of significance at 0.1. The equity mutual fund had limited risk and diversification however it generated average return but had a higher efficiency than stock portfolio using Magic Formula which is a well-known approach and popular for investors.