Momentum-quality returns

The following table 11 presents results for portfolios formed by combining both momentum and quality signals. As previously, the portfolio consists of stocks that exhibit both given signals simultaneously.

Table 11. Integrating momentum-quality portfolio returns

Integrated momentum-quality portfolio returns in the sample, January 1993 - December 2019 The table below reports the returns of the integrated momentum-quality portfolios. Stocks in the sample are assigned to five quintile portfolios based on their ranking for the momentum and quality signals simultaneously. High - Low is the long/short portfolio composed of the extreme quintiles. Panel B reports the time-series averages for each of the signals in addition to size and sample counts. Sharpe and Sortino ratio are annualized. For portfolio characteristics the differential between high and low portfolio is reported.

Panel A: Portfolio returns

The results are similar to that of the integrating momentum-value portfolios. The results are improved for every metric, with the monthly excess return improving by 34 basis points compared to the single-signal momentum portfolio, and the Fama-French alpha increasing by 22 basis points, with a modest improvement in risk-adjusted performance and drawdowns. While the performance is improved, the results are not as extreme as with the momentum-value portfolios.

Whereas the momentum and quality signals are stronger for the portfolios, a negative relation with the value signal can be observed, where the high portfolio is more biased towards growth stocks, whereas the low portfolio consists of value stocks. This is consistent with both momentum and quality stocks. The average market capitalization is also increasing with momentum and quality, which is also consistent with the individual factor portfolios. Overall, the largest difference in portfolio composition is the diversification of the portfolio. The portfolio is again less diverse than individual factor portfolios, with the highest quintile consisting of 115 stocks on average. While this is higher than for the momentum-value integrating portfolio, it is still much lower than for the single-signal portfolios.

The table 12 below presents results for mixing single-signal momentum and quality portfolios. As before the portfolio is constructed by having 50% of the long or high portfolio invested into stocks with high momentum, and 50% to stocks with high quality or profitability. Similarly, the short or low portfolio will consist 50% of stocks with low momentum, and 50% with low gross profitability.

Table 12. Mixing momentum-quality portfolio returns

Mixing momentum-quality portfolio returns in the sample, January 1993 - December 2019 The table below reports the returns of the mixing momentum-quality portfolios. Stocks in the sample are assigned to separate five quintile portfolios based on their ranking for the momentum and quality signals, which are then combined with 50/50 weights. High - Low is the long/short portfolio composed of the extreme quintiles. Sharpe and Sortino ratio are approximately the average of the single-signal portfolios, while the risk-adjusted performance measures are improved. While the improvement is not as substantial as with the momentum-value mixing portfolio, an improvement in Sharpe ratio of 0.098 and an improvement in Sortino ratio of 0.334 can be observed. The worst monthly drawdown and maximum drawdowns are reduced to approximately half of the momentum portfolio drawdown measures, with a worst monthly drawdown of -11.79%

versus 27.24% of the momentum longshort portfolio, and maximum drawdown of -23.33% versus -47.01% of the momentum long-short portfolio. Overall, the implications are largely the same as for the momentum-value mixing portfolio. The performance in

terms of excess and abnormal returns is reduced, but the risk-adjusted performance and stability of returns is improved.

The following table 13 presents the results for the momentum-quality portfolio formed by taking the average of the ranks for the momentum and quality signals.

Table 13. Average rank momentum-quality portfolio returns

Average rank momentum portfolio returns in the sample, January 1993 - December 2019 The table below reports the returns of the average rank momentum-quality portfolios. Stocks in the sample are assigned to five quintile portfolios based on their average ranking for the momentum and quality signals. High - Low is the long/short portfolio composed of the extreme quintiles. Panel B reports the time-series averages for each of the signals in addition to size and sample counts. Sharpe and Sortino ratio are annualized. For portfolio characteristics the differential between high and low portfolio is reported.

Panel A: Portfolio returns

The average rank momentum-quality portfolio benefits from improved risk-adjusted performance, whereas there is no improvement in excess and abnormal return performance compared to the single-signal momentum portfolio, though the return performance is improved when comparing to the single-factor quality portfolio. The risk-adjusted performance compared to the single-signal momentum portfolio is improved in terms of Sharpe by 0.089 and in terms of Sortino by 0.317. The drawdowns are also smaller with the worst monthly drawdown increasing to 16.02 % and the maximum drawdown increasing to 30.76 %.

Again, a negative relation between the momentum-quality portfolio and B/M ratio can be observed, with the B/M decreasing monotonically with higher gross profitability and momentum. The size of the firms also increases monotonically with momentum and gross profitability, which is expected based on the single-signal portfolio results.