Contrarian investment strategy based on reward-risk stock selection criteria

Stock selection criteria play a key role in contrarian portfolio construction. The usual approach is applying cumulative return as stock selection criteria however applying this criterion leads to ranking stocks without considering investment risk. In this study، we analyze contrarian strategies that are based on reward–risk stock selection criteria in contrast to ordinary contrarian strategies based on a cumulative return criterion. For this purpose، a sample of 80 companies in Tehran Stock Exchange during March 2007 to February 2012 has been studied. The result for our 6/6 contrarian strategy shows statistically significant abnormal profit for contrarian strategies. Moreover، we find that although the cumulative return provides the highest total return، reward-risk measures provide much better risk adjusted performance than cumulative return.