This thesis investigates the potential of beating the market index for an investor by investing
in Artificial Intelligence (AI). We have analysed the performance of Nasdaq CTA Artificial
Intelligence & Robotics (NQROBO) from January 2018 to August 2023, comparing it to the
Nasdaq Composite (NASDAQ) and S&P 500. We have simulated the behaviour of an openminded
investor who uses simple prediction models to forecast returns. We have tried to make
this simulation as realistic as possible using minimal hindsight. Our thesis is based on three
analyses: a historical analysis evaluating NQROBO’s performance, a pseudo-out-of-sample
forecasting performance analysis exploring how an investor in real time utilising a forecasting
tool would perform, and lastly, an optimal relative weighting analysis of NQROBO, based on
the pseudo-out-of-sample analysis.
The historical analysis revealed that NQROBO outperformed the market from 2020 through
2022. It also uncovered that the Alpha was primarily positive from 2020 to early 2022, before
turning negative in 2022. The Beta was lower than the market until 2022 before increasing
sharply and stabilising at 1,1. Regarding the Fama French Factors, we identified the market as
a consistent driver for returns. HML, RMW and CMA fluctuating greatly, being mostly
negative, suggesting that NQROBO performs best when the market favours growth-oriented
firms with an aggressive investment strategy. Indicating that the index has the potential of
outperforming the market over certain periods if the market conditions are favourable.
Furthermore, the pseudo-out-of-sample forecasting performance analysis showed that
portfolios utilising Sharpe Ratio, RMSE and Hybrid RMSE weighting could outperform the
market, if rebalancing daily. Suggesting that potential gains of investing in NQROBO is short
lived. Lastly, our optimal relative weighting analysis of NQROBO’s shows that a highly
dynamic weight allocation that is rebalanced frequently is beneficial. Enabling the portfolio to
capture short-term gains and beating the market index over the period. The findings suggest
that investing in AI offer the potential of beating the market index if done flexibly.nhhma
