Stock Selection Strategy And Fund Product Design Based On Four-factor Model

With the development of China’s economy,the stock market as a barometer of economy grows extremely fast.By the end of December 20th,2017,the listed companies in China’s stock market reached 3,485,and the whole stock market capitalization run up to 56.7 trillions RMB.In recent years,the strategy selection and trading style of brokerage firms、public funds、private funds and futures industry varied from each other in the background of quantitative investment gradually emerging in domestic capital market.Quantitative investment combines the quantitative method with the computer program together by people to obtain the stable incomes in the transaction when proposes a trade order.Multi-factor stock selection model of the quantitative investment is one of the critical methods of establishing the stock pool to obtain the stable incomes by investment institutions.Therefore,the paper discusses the four-factor stock selection strategy,which was established by Mark Carhart,hoping to find a profitable portfolio that supasses the market index.In my paper,four factors are constructed in the model such as market factor,size factor,value factor and momentum factor.Through using these factors,the paper established a model to reflect the relations between stock returns and four factors.After fulfilled the establishment of the four-factor model,the paper established a strategy of stock selection,developed a fund product,and validated the feasibility of the strategy of stock selection through comparing the rate of return of fund product and the average rate of return of A stock market.The paper expects that the strategy of stock selection can gain excess earnings for institutional investor and finds a investment portfolio to surpass the market index.The paper mainly analyze the following aspects:firstly,the paper selected 2628 floating stocks in CSMAR from April 2006 to March 2016 as the object of research.Through calculating the market value of floating stocks,book value per share,the average rate of returns of floating A stocks,and the cumulated rate of returns from April 2007 to March 2016,the paper can get the indicators of market factor,size factor,value factor and momentum factor.All of these be took as the independent variables,and the monthly rate of return of individual share as the dependent variable to establish the linear regression model.According to the linear regression model,we find that the market factor,size factor,and momentum factor have a positive correlation with the rate of return of individual share,but the value factor has a negative correlation with the rate of return of individual share.After validating the significance of the factor coefficients and fitting degree of the model,we can see the validation results of the factor coefficients and fitting degree of the model are good.Secondly,the paper established the strategy of selection based on the relations between the rate of returns of individual share and the four factors,and developed the fund products at the same time.Last but not the least,the paper applied the strategy of stock selection to invest the investment portfolio,and simulated the investment performance of fund products from April 2007 to March 2016,which indicated that rate of returns through the strategy of stock selection surpassed greatly the average rate of returns of A stocks.The fund product gained the average annualized return of 21.65%in consecutive 9 years,on the other hand,the average annualized return of A stocks only reached 7.77%in consecutive 9 years.