Risk and Return in Financial Markets: Evaluating Investment Strategies for Optimal Portfolio Management

Abstract

The analysis of risk and returns remains a very significant factor in investment management because it is necessary to consider the expected return on investments relative to systematic risk. The multi-factor model has a broader perspective than the single-factor model. This study examined investment strategies for optimal portfolio management by evaluating the influence of market, size, value, profitability, and investment factors on portfolio excess returns. A quantitative research design was employed using secondary monthly Fama–French Five-Factor data covering the period from July 1963 to March 2026. The analysis incorporated descriptive statistics, correlation analysis, variance inflation factor assessment, Ordinary Least Squares regression, Sharpe ratio estimation, and residual diagnostic tests to evaluate portfolio performance and model reliability. The findings showed that the model explained 88.5% of the variation in portfolio excess returns. Market excess return exerted the strongest positive influence on portfolio performance, while size, value, and profitability factors were also positive and statistically significant. In contrast, the investment factor was statistically insignificant. The constructed portfolio generated an annualized return of 5.22%, annualized volatility of 10.06%, and a Sharpe ratio of 0.519, indicating moderate risk-adjusted performance. Diagnostic tests further confirmed the statistical reliability of the estimated model. The findings demonstrate that portfolio returns are influenced by multiple systematic risk factors rather than market exposure alone. The study therefore supports the usefulness of factor-based portfolio analysis in improving investment evaluation and portfolio management decisions.