Fundamental beta and portfolio performance: evidence from an emerging market

Abstract

The market beta is decomposed into fundamental and bubble beta to assess their effectiveness in the portfolio performance in both static and dynamic time-varying frameworks. The empirical results from India on 12 sectoral indices with NIFTY 500 as the market index establish that the portfolio constructed using the fundamental beta proportions performs better than the naïve, Markowitz mean-variance, market, and bubble beta portfolios with larger Sharpe ratio in both the static and dynamic time-varying estimates. These results open up far-reaching implications for investment analysis and contribute to the recent literature that combines fundamental analysis in the construction of portfolios.