OUTPERFORMING STOCK INDICES USING PROXIES FOR RISK AND RETURN

Vashishta Bhaskar
Duquesne University
ABSTRACT
This study builds on earlier findings that factors such as size, value and momentum are
responsible for portfolio returns. In addition it has been shown that capital expenditures by the
firm are predictors of future returns. This study examines the impact of capital expenditures and
incorporates Altman’s Zeta score, a measure of bankruptcy as a proxy for risk based on firm
specific financial statements. The study finds that excess return effects are present and statistically
significant in small- cap and mid- cap stocks. The findings show that absolute and risk–adjusted
returns are significantly improved by using capital expenditure and Z-Scores as discriminants for
security selection. Thus the conclusion that investors using public information, can systematically
outperform stock indices by using a multiple factor model such as capital expenditures and
Altman’s Z-score as proxies for expected returns and risk.