There are two competing models that try to clarify the cross-section stock returns that are unexplained by the CAPM. Fama and French (1993) and Carhardt (1997) show that the asset pricing anomalies are driven by specific risk factors, whereas Daniel and Titman (1997) find out, that the anomalies are driven by the firm characteristics of the stocks. As a Benchmark we use a native model, which uses as return the statistical mean and as covariance matrix the statistical covariance matrix of the historical data. We show the difference and the influence of both models for an investor, but principally his portfolio optimization for the whole. The empirical verification and comparison is based on data from the 11 European countries that together instituted the euro in 1999, during the time period from July 1, 1995 to June 1, 2010. We show that a maximizing Sharpe ratio investor cannot gain by the additional information. The native model outperforms both models with a Sharpe ratio of 0.32610, whereas the factor model has its highest value of 0.28270 and the characteristic model a value of 0.24070. The native model also outperforms the other models if we have a minimizing variance investor. The Sharpe ratios are 0.34300 for the native model, 0.20630 for the characteristic model and 0.26420 for the factor model. The third result is that the optimal Sharpe ratio is positive correlated for all models with the amount of shares in a portfolio.      «

There are two competing models that try to clarify the cross-section stock returns that are unexplained by the CAPM. Fama and French (1993) and Carhardt (1997) show that the asset pricing anomalies are driven by specific risk factors, whereas Daniel and Titman (1997) find out, that the anomalies are driven by the firm characteristics of the stocks. As a Benchmark we use a native model, which uses as return the statistical mean and as covariance matrix the statistical covariance matrix of the his...     »