The method of stock selection with the intention of portfolio formation

The purpose of this study is comparing the method of selecting and forming portfolios. The methods are Capital Assets Pricing Model, Fama and French Model and Excess return model. The methods are transacted in four steps: expected return estimation, stock valuation, selecting portfolios and estimating all kinds of portfolios’ returns and risk. In the point of forming portfolios, the decision variables were estimated to compare the methods. There are two questions: are the portfolio forming methods significant at Tehran Security Exchange? And, are there significant differences between methods with the view of generating Expected Rate of Return, Real Return, Risk, Differential Extents of market return and risk-free return? Multivariate Regression, One Way ANOVA and Correlations Tests are used to analyze and test models. The research finding shows that the models have the ability to perform significantly in Tehran Security Exchange. The models were significantly different in five important measures. They are risk, the future actual return, expected return in short and long terms. Finally, it was evidenced that not only there are significant differences between the three models, but also Excess return method was more efficient than the other models.

Keywords: expected return, intrinsic value, book value, market value, firms’ size.
JEL Classification: D46, G12, G14, G30, G32