PROBLEMS IN MEASURING PORTFOLIO PERFORMANCE - AN APPLICATION TO CONTRARIAN INVESTMENT STRATEGIES

We document problems in measuring raw and abnormal five-year contraria n portfolio returns. 'Loser' stocks are low-priced and exhibit skewed return distributions. Their 163% mean return is due largely to their l owest-price quartile position. A $1/8th price increase reduces the mea n by 25%, highlighting their sensitivity to microstructure/liquidity e ffects. Long positions in low-priced loser stocks occur disproportiona tely after bear markets and thus induce expected-return effects. A con trarian portfolio formed at June-end earns negative abnormal returns, in contrast with the December-end portfolio. This conclusion is not li mited to a particular version of the CAPM.