Abstract:

The classical models for construction of investment portfolio takes into account only two criteria for assessing investment opportunities: expected return and risk measured with a variance This approach can be criticized for several reasons. Firstly, it takes into account only information that is revealed in the market prices of the stock. However a more detailed analysis of the situation of a company, based on some fundamental indicators, can provide more clues about possible risks and opportunities connected with investing in its stocks. Secondly, the variance can be a poor measure of risk in the situation of big jumps in stock prices, when the distribution of returns differs much from the normal distribution. Thirdly, the disadvantage of the variance is that it treats in the same way negative and positive deviations from the expected return. In the paper we consider some extension of classical portfolio theory and try to evaluate them in the situation of the crisis. We consider some additional criteria for portfolio selection, based on the market multiples representing overall situation of companies. Additionally, we consider semi-variance as an alternative measure of risk. We construct a range of portfolios which were build using different criterion for risk and fundamental values of companies from the Polish stock market. Then we compare their returns in the situation of crisis after outburst of Covid-19 pandemic. The results from empirical research for the major companies traded on the Warsaw Stock Exchange reveals that investors can receive better investment results by augmenting standard Markowitz model with an additional criterion connected with a fundamental standing of companies such as book to market or earnings to market. The second result is that using nonclassical risk measures, such as semi-variance instead of variance, gives better results and this method of measuring risk is especially essential in in the period of collapse on the capital market.