Abstract
This paper used the composite construction method proposed by Haugen (1999) and its application by Zhao and Wang (2010) for the Chinese stock market. Utilizing the Shanghai A-share market stocks data, this paper first selected the shares listed on the Shanghai Stock Exchange during January 1, 1997 to December 31, 2017. A portfolio was then built according to the mean variance model of portfolio structure, and simulation results were analysed using the Wilcoxon Signed Rank Test. The relationship between risk and return in the long and short term was explored. Results indicated no significant relationship between the risk and return of the stock portfolio in the short run, which reflects the complexity of the Chinese stock market. However, in the long run, the risk and return of the stock portfolios are positively correlated, which means that high returns are accompanied by high risks, indicating that the stock market will eventually return to rationality. In other words, the A-share stock market will eventually return to be value-driven and the short-term speculators would be outweighed by long-term value investors.
Highlights
Modern investment theory claims that high return is accompanied by high risk and low return by low risk
When using a small sample to analyze the relationship between short-term risks and returns, this paper finds that the relationship is not significant
Using stocks data listed on the Shanghai A share market, it selected the stocks which have been listed on the Shanghai Stock Exchange for the period from January 1, 1997 to December 31, 2017
Summary
Modern investment theory claims that high return is accompanied by high risk and low return by low risk. By contrast, when rational investments of long-term investors overwhelm market speculations, the “risk return trade-off ” effect makes the simple law of “high risk with high return, low risk with low return” a reality. This paper studies the transition of Chinese stock investors (especially retail investors) between the two different styles of rationality and speculation by studying the trade-offs of risk and return in both the longand short terms. It enables investors to make a rational choice between long-term and short-term risks and returns, making the market and the formulation of regulatory policies more mature. Through the analysis of short-term and long-term returns, regulators have a clearer understanding of investors’ trading behaviors, formulating better targeting policies.
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