Bleeding for profit. Researching the efficiency of positively skewed portfolios in the Norwegian financial markets.

Abstract

Portfolios created by hyper defensive and hyper aggressive derivatives aims to limit the size of potential downside returns, whilst at the same time benefit from potentially large returns. However, the portfolio will experience long periods of small losses, bleeding. This thesis has empirically researched bleeding portfolios in the Norwegian financial markets. The research question that has been examined is:

Could a barbell portfolio with extremely positively skewed derivatives create risk-adjusted excess returns in the Norwegian financial market between 2005-2015 compared to alternative investments?

By creating portfolios of OBX-total return index put options and Norwegian treasury bills, there has been created six portfolios. The portfolios have varied in time horizon, 3 or 6 months, and risk balance; 90%, 80% or 70% in treasury bills. Furthermore, they have invested with both varying and constant monthly investments. To evaluate return, risk, risk-adjusted performance and other characteristics, several measurements have been calculated and compared to a benchmark portfolio. This benchmark portfolio was created by investments in OBX-total return index. The empirical analysis found that the bleed portfolios performed worse than the OBXportfolio when evaluating risk-adjusted performance. However, it was found some characteristics with the bleed portfolios that investors are known to appreciate: skewness, “floor” on negative returns and potential high upside. Furthermore, it was found that, due to the illiquid Norwegian out-of-the-money put option market and few observations, the evaluation of these bleed portfolios cannot be generalized. There is large uncertainty regarding the evaluation of skewed portfolios, in accordance with the law of large numbers.