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Multi-Factor Sector Based Investment Strategy (MFSS)

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STAT 682 Quantitative Financial Analytics STATISTICS Multi-Factor Sector Based Investment Strategy (MFSS) Team Ichiban: Wei Fu, Dingyi Li, Fei Ni, Taliya Perera ... – PowerPoint PPT presentation

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Title: Multi-Factor Sector Based Investment Strategy (MFSS)


1
Multi-Factor Sector Based Investment Strategy
(MFSS)
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Team Ichiban
  • Wei Fu, Dingyi Li, Fei Ni, Taliya Perera,
    Benjamin Tang
  • 28th November 2011

2
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Benchmarks Back-testing the Funds Strategy
  • Returns and Results
  • Conclusion

3
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Fund Investment Strategy
  • The Original OShaugnessey Multi-factor Strategy
  • Price-to-Earnings (PE) ratio between 0 and 20,
    then selecting Best One-Year Performers (Top
    50).
  • Price-to-Book (PB) ratio less than 1, then
    selecting One-Year Performers (Top 50).
  • Price-to-Sales (PSR) ratio less than 1, then
    selecting One-Year Performers (Top 50).

4
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Fund Investment Strategy
  • Multi-Factor Sector Based Strategy
  • Why did we add Sector Analysis to
    OShaugnessys method?
  • Correlation trades, Proxy trades, Complementary
    growth,
  • Difference of inter-sector indicator norms.
  • Growth is under-represented in his model
    relative to momentum
  • and value.
  • How did we add Sector component into the
    strategy?
  • The top 50 stocks in each of the multifactor
    model are identified.
  • Sector proportion (Ps) of the top 50 stocks are
    compared against the
  • (Pu) of the entire universe.

5
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Fund Investment Strategy
  • 3 Different MFSS Approaches
  • Top 10 stocks using the original approach, plus
    the top 5 stocks from the highest ranked sector.
    (Total of 15 stocks).
  • Top 15 stocks using the original approach, with
    stocks in the highest ranked sectors (if any)
    given double weight.
  • Top 3 stocks each from the 5 highest ranked
    sectors.

6
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Benchmarks Back-testing the Funds Strategy
  • Returns and Results
  • Conclusion

7
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Data Management Process
  • Wharton Research Data Services (WRDS)
  • - Compustat Fundamentals Annual
  • - CRSP Monthly Stock File
  • Annual Returns of Portfolios
  • - Dividends included
  • - Adjusted for AJEX (Splits and Such)
  • - Accounted for data lags (April 1st
    Rebalancing)
  • Other Adjustments/Assumptions
  • - March Month-End price close used. (CAPM
    assumption of sorts)
  • - Brokerage (1 hit p.a. in 1970s 80s, 450
    p.a. thereafter.)
  • - Tax deferred investment account.
  • - Delisting and Acquisitions

8
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Benchmarks Back-testing the Funds Strategy
  • Returns and Results
  • Conclusion

9
STAT 682 Quantitative Financial Analytics
STATISTICS
Portfolio Selection Mechanism General
Procedure - Recreate OShaugnesseys ranking
(by previous returns) for each of the
three segments in his portfolio. - Calculate
the Ps Pu for each of the three segments. -
Apply it to generate the portfolios for the
funds strategy.
10
STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (1975)
11
STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (1985)
12
STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (1995)
13
STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (2005)
14
STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (2009)
15
STAT 682 Quantitative Financial Analytics
STATISTICS
Sector Weights
16
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Benchmarks Back-testing the Funds Strategy
  • Returns and Results
  • Conclusion

17
STAT 682 Quantitative Financial Analytics
STATISTICS
Creating Benchmarks Compared against -
OShaugnesseys Reduced Portfolio Returns -
NYSE/SP Returns - Against the other
Sector-based Strategies
18
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Benchmarks Back-testing the Funds Strategy
  • Returns and Results
  • Conclusion

19
STAT 682 Quantitative Financial Analytics
STATISTICS
Returns and Results (Seed Capital 10k)
20
STAT 682 Quantitative Financial Analytics
STATISTICS
Returns and Results (Seed Capital 10k)
21
STAT 682 Quantitative Financial Analytics
STATISTICS
Returns Summary Statistics
22
STAT 682 Quantitative Financial Analytics
STATISTICS
Annual Returns
23
STAT 682 Quantitative Financial Analytics
STATISTICS
5 Year Rolling Returns
24
STAT 682 Quantitative Financial Analytics
STATISTICS
10 Year Rolling Returns
25
STAT 682 Quantitative Financial Analytics
STATISTICS
Returns Beating Ratios
26
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Scope
  • Fund Investment Strategy
  • Dataset Management Process
  • Portfolio Selection Mechanism
  • Creating Benchmarks
  • Back-testing the Funds Strategy
  • Conclusion

27
STAT 682 Quantitative Financial Analytics
STATISTICS
  • Conclusion
  • Advantages of the MFSS Investment Strategies
  • Downside Risks
  • Schumpeterian Theory of Growth
  • Back-testing as Optimization of Hindsight
  • Leverage as a matter of Preference

28
STAT 682 Quantitative Financial Analytics
STATISTICS
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