The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix

摘要

In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.