Title: Portfolio optimization with analyst forecasts
Authors: Sunyoung Kim - KAIST (Korea Advanced Institute of Science and Technology) (Korea, South) [presenting]
Chulwoo Han - Durham University (United Kingdom)
Abstract: The aim is to examine the forecast power of analysts' target prices and their utlization in portfolio optimization. Abnormal returns of stocks are predicted from analyst forecasts, which are then used for expected return estimation. Stocks with non-zero abonormal return forecasts are selected and combined with an market index to form an optimal portfolio. Tested on S\& P500, we find that analyst target prices are significant in forecasting future returns but other forecasts such as earnings per share do not help predict future returns. When the assets with nonzero abnormal returns are optimally combined with the market index, the resulting optimal portfolio turns out to outperform the index.