Monthly Long–Short Stock Selection by ROA Within Size Groups

Summary

This strategy ranks U.S. stocks by return on assets (ROA) separately within larger- and smaller-capitalization groups. ROA is defined using quarterly income before extraordinary items divided by assets from the prior quarter. Within each size group, it buys the highest-ROA three deciles and shorts the lowest-ROA three deciles, with equal weighting and monthly rebalancing.

The implementation describes a narrower universe than the stated research design: it selects up to 500 liquid U.S. stocks with fundamental data and applies price, sales, exchange, and nonzero-ROA filters. It then assigns holdings using portfolio weights and liquidates securities that leave the selected groups. The document provides implementation details but no performance results or evidence that the strategy earns excess returns. Its practical interpretation is also limited by differences between the stated universe and the code, as well as implementation choices such as leverage, fees, and the handling of small groups.

Key ideas

• ROA is calculated as quarterly income before extraordinary items divided by prior-quarter assets.
• Stocks are split into two market-capitalization groups before ranking on ROA.
• The strategy buys the top three ROA deciles and shorts the bottom three deciles within each size group.
• The portfolio is equally weighted and rebalanced monthly.
• The implementation uses a liquid-stock subset and adds leverage and fee assumptions.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.