Investment Portfolio Structure Based on Policy Orientation in Emerging Markets: Example from Emerging Industries of Strategic Importance in the Greater Bay Area of China

Abstract

This article employed data of all listed firms in Shanghai and Shenzhen Stock Exchange of China, screened companies feasible for policy orientation including emerging industries of strategic importance and the Greater Bay Area strategy to form an investment portfolio, to study whether policy orientation is a feasible information source for individual investors in emerging markets. Around 10 target stocks were selected and weighted according to their scale in Market Value respectively, and a 3-year back test was conducted in order to compare the performance of the portfolio and market. Heterogeneous position-adjustment strategies were considered to simulate the excessive transaction behavior of individual investors. Cumulative total and annualized return, volatility rate and Sharpe ratio were calculated using the data within the past 3 years to indicate the performance of the portfolio. It has shown that the Sharpe ratio of the portfolio was high, regardless of whether an adjustment of position was made. Also, the portfolio significantly outperforms the benchmark index, with a higher frequency of earning a positive excessive return on a day-to-day basis. It can be concluded that policy orientation can be applied in investment portfolio decisions for individual investors, in weakly-efficient emerging markets where the source of information is limited.