Quality minus junk on the JSE

Van Reenen, Conrad
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Price is theorized to be an indicator of quality. But cam quality be an indicator of price? As price is constituted of a multitude of variables that determines its realizable value and overall return over time as the price fluctuates. Instead of looking at price inherently, it is simpler to study what drives those returns, which entails fundamental factors that affect price itself. One of these is quality, which is a subjective word in principle, as there are various measures of quality. To determine the inherent aspects of quality: profitability, growth, and safety. Determining if this new factor variable has any significance on the JSE will help establish its relevance to the South African market. This study uses an approach to quality sorting, using the central qualities of quality to construct a Quality minus Junk portfolio strategy on the Johannesburg Stock Exchange. Using the results of the Fama-MacBeth regression. Quality stocks do provide risk-adjusted returns on the market, this only being a small amount, though still significant statistically and able to capture more returns than the other established factor variables. Therefore, the QMJ portfolio approach is worth noting in a South African market context. As other factors mainly look for the inherent value being mispriced, identifying a quality spectrum from quality to junk benefits investors in understanding the potential long run returns of quality and helps take advantage of the volatility of junk
A research report submitted in fulfilment of the requirements for the degree of Master of Commerce (Business Finance) to the Faculty of Commerce, Law and Management, School of Economic and Finance, University of the Witwatersrand, Johannesburg, 2021