Do shares exhibit a momentum effect from one month to the next?
If we selected the best performing shares in one month and created an equally-weighted portfolio of those shares to hold for the following month, would that portfolio out-perform the market index? Or, more interestingly, if we did this systematically every month (i.e. our portfolio each month is comprised of the best performing shares in the previous month), would that portfolio out-perform the market?
The following chart shows the results of operating two such momentum portfolios from 2011-2014:
- Port (5): at the end of each month selects the 5 best performing shares and holds these for the following month, re-balancing at the end of each month
- Port (10): as above, but the portfolio holds 10 shares each months
Both portfolio values have been re-based to start at 100, as has the FTSE 100 Index included in the chart as a benchmark.