Based On The Characteristics Of Cross Sectional Optimization Of Portfolio Construction And Exploration

The cross-section of stock returns widely exists in the worldwide stock markets. Many researches find that some variables related to the fundamentals of listed company can be used to predict future stock returns, including the size of the company (ME), book to market value ratio(BE/ME),earnings price ratio(E/P) and so on. Stocks with similar characteristic values often have low or high average returns which are contrary to the efficient market hypothesis (EMH) and capital asset pricing model (CAPM). Many scholars devote to the researches into cross-sectional phenomenon trying to explain the anomalies by improving modern finance theory and behavior finance theory.The phenomenon indicates we can construct a portfolio based on some characteristic variables for excess return. As a starting point, this paper tests and verifies cross-sectional returns on Chinese stock market by qualitative and quantitative methods, including existence, significance, stability and evolution of cross-section of stock returns. Then we watch the performance of portfolio constructed according to ME and BE/ME, compared with market index. The empirical conclusion based on sample data from June2006to May2011shows that, the size effect exists and is notable, and the value effect exists but is not significant. For the purpose of industry configuration, the paper examines cross-sectional phenomenon in the real estate plate, results show that, both effect exist, but are not significant. At last, portfolio optimization is explored on the aspect of portfolio adjustment frequency and weight distribution.