Portfolio Sorting by Leverage Ratio and Validation in American Stock Market

Abstract

The stock market has high risks. The purpose of this project is to sort five different portfolios from all stocks in S&P 500 by the leverage ratio, then perform both time-series and cross-sectional regression on each of the portfolios to find anomalies of pricing, also test whether to choose risk-premium or hedging strategy, and finally build both an out-performing strategy and a long-short strategy. Putting more stocks into the portfolio can help analysts carry out comprehensive analysis on different situations, periods, and types of investment portfolio, so as to disperse risks, in order to ensure the diversity of portfolio and a lower risk.