### Testing Stock Anomalies in Practical Context

**March 31, 2017** - Bonds, Equity Premium, Strategic Allocation

How do widely studied anomalies relate to representative stocks-bonds portfolio returns (rather than the risk-free rate)? In his March 2017 paper entitled “Understanding Anomalies”, Filip Bekjarovski proposes an approach to asset pricing wherein a representative portfolio of stocks and bonds is the benchmark and stock anomalies are a set of investment opportunities that may enhance the benchmark. He therefore employs benchmark-adjusted returns, rather than excess returns, to determine anomaly significance. Specifically, his benchmark portfolio captures the equity, term and default premiums. He considers 10 potentially enhancing anomalies: size, value, profitability, investment, momentum, idiosyncratic volatility, quality, betting against beta, accruals and net share issuance. He estimates each anomaly premium as returns to a portfolio that is each month long (short) the value-weighted tenth, or decile, of stocks with the highest (lowest) expected returns for that anomaly. He assesses the potential of each anomaly in three ways: (1) alphas from time series regressions that control for equity, term and default premiums; (2) performances during economic recessions; and, (3) crash proneness. He measures the attractiveness of adding anomaly premiums to the benchmark portfolio by comparing Sharpe ratios, Sortino ratios and performances during recessions of five portfolios: (1) a traditional portfolio (TP) that equally weights equity, term and default premiums; (2) an equal weighting of size, value and momentum premiums (SVM) as a basic anomaly portfolio; (3) a factor portfolio (FP) that equally weights all 10 anomaly premiums; (4) a mixed portfolio (MP) that equally weights all 13 premiums; and, (5) a balanced portfolio (BP) that equally weights TP and FP. Using monthly returns for the 13 premiums specified above from a broad sample of U.S. stocks and NBER recession dates during July 1963 through December 2014, *he finds that:* Keep Reading