Improved Back Test of Magic Formula in Malaysian Stock Market Using Applied Programming and Online Quantitative Platform

Greenblatt’s Magic Formula (MF) has proven effective in the different stock market over the world. However, there is no academic research to investigate its effectiveness in the Malaysian stock market. To fill in the gap of literature. This study applied programming and quantitative finance method to back-test Malaysian stock data from 2004 to 2019. Besides, this research also tests different financial indicators, market capital and portfolio size for finding the optimal MF for the Malaysian stock market. The KLSE index was selected as the benchmark. CAPM model and a variety of financial ratios were applied to evaluate the performance. Risk-reward of portfolios also considered. The results showed that 15 of 18 portfolios deliver a higher return than the benchmark. However, compare the performance of the MF in the United States and other markets. The Malaysian market has not shown its advantages. For further tests, compared with Earning before interest and tax(EBIT) which used in the original MF. Gross profit (GP) is more suitable in the Malaysian stock market. It is worth mentioning that when GP applied to formulas. The performance of small market capitalization portfolios is better than that of large market capitalization portfolios. It exactly contradicts the original MF