Smart Beta Investment

Smart Beta Investment is a website, designed like a platform which will help users to find what investment strategy is the best, according to the financial market and user parameters.

The financial crisis, that began in September 2008 with the bankruptcy of one of the most famous investment bank in the world, Lehman Brothers, led investors and bankers to rethink the risk, considered up to this point as “wise”. This new way of thinking led investors to search for innovative strategies, controlling the risk as possible as it can be.

Those strategies are known as “Smart Beta Strategies”. This generic term causes critics of some, praises from others but in any case, it is surprising the whole banking community. But what is “Smart Beta”? How does it work? What are the characteristics of such strategies? Are “Smart Beta” investments really efficient? These are the questions we tried to answer through this study project. All along the seven-month project we worked on the creation of a website, designed like a platform which will help users to find what investment strategy is the best, according to the financial market and user parameters. But before to give more details about our final realization, we have to explain, succinctly, what “Smart Beta Investments” are?

The “Smart Beta” concept references to stock investment strategies which focus only on particular sets of equities. The purpose of such strategies is to deliver a better risk and return trade-off than conventional index by using alternative weighting schemes (volatility, dividends, social rates…)
Our final achievement, a website, has been designed around three major issues, which are the following:

  • How to analyze the market?
  • How to help investors to choose the best investment strategy?
  • How can we optimize a portfolio?

To answer the first of these three questions we decided to use mathematical analysis tools such as simple and exponential moving averages… To help investors, we decided to compare various indices (Smart Beta and traditional cap-weighted indices) and we created an algorithm to optimize an existing portfolio.
If those functions and methods already exist, our innovation is the use of Smart Beta indices. However, face to the large number of smart beta indices and their complexity, we decided to only deal about ESG and Maximum Decorrelation indices. For almost the same reasons, we reduce our scope of equities to CAC 40 equities only.

To give a justified answer to the question of Smart Beta efficiency, we tested the ESG index on a three-month period. At the end of this test period, we are able to say that, in a rising market, ESG Index is outperforming traditional cap-weighted indices. To answer definitively to the efficiency issue, we should test our index in a bear market.

If our final achievement is operational, it is still perfectible, our base of equities and indices being restricted. Having chosen the “Open Source” valorization, we hope our project will be improved by other students or enthusiast people. This is also with the objective to share our project that we decided to create the website “ECE-Finance Projects”.

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