1st Edition

Quantitative Equity Portfolio Management Modern Techniques and Applications

    464 Pages 81 B/W Illustrations
    by Chapman & Hall

    Quantitative equity portfolio management combines theories and advanced techniques from several disciplines, including financial economics, accounting, mathematics, and operational research. While many texts are devoted to these disciplines, few deal with quantitative equity investing in a systematic and mathematical framework that is suitable for quantitative investment students. Providing a solid foundation in the subject, Quantitative Equity Portfolio Management: Modern Techniques and Applications presents a self-contained overview and a detailed mathematical treatment of various topics.

    From the theoretical basis of behavior finance to recently developed techniques, the authors review quantitative investment strategies and factors that are commonly used in practice, including value, momentum, and quality, accompanied by their academic origins. They present advanced techniques and applications in return forecasting models, risk management, portfolio construction, and portfolio implementation that include examples such as optimal multi-factor models, contextual and nonlinear models, factor timing techniques, portfolio turnover control, Monte Carlo valuation of firm values, and optimal trading. In many cases, the text frames related problems in mathematical terms and illustrates the mathematical concepts and solutions with numerical and empirical examples.

    Ideal for students in computational and quantitative finance programs, Quantitative Equity Portfolio Management serves as a guide to combat many common modeling issues and provides a rich understanding of portfolio management using mathematical analysis.

    INTRODUCTION: BELIEFS, RISK, PROCESS
    Beliefs
    Risks
    Quantitative Investment Process

    PORTFOLIO THEORY
    Distributions of Investment Returns
    Optimal Portfolios
    Capital Asset Pricing Model (CAPM)
    Characteristic Portfolios

    RISK MODELS AND RISK ANALYSIS
    Arbitrage Pricing Theory and APT models
    Risk Analysis
    Contribution to Value at Risk

    EVALUATION OF ALPHA FACTORS
    Alpha Performance Benchmarks-The Ratios
    Single Period Skill: Information Coefficient
    Multi-Period Ex Ante Information Rati

  • Empirical Examples

    QUANTITATIVE FACTORS
    Value Factors
    Quality Factors
    Momentum Factors

    VALUATION TECHNIQUES AND VALUE CREATION Valuation Framework
    Free Cash Flow
    Modeling Business Economics of a Firm
    Cost of Capital
    Explicit Period, Fade Period, and Terminal Value
    Multi-Path Discounted Cash Flow Analysis

    MULTI-FACTOR ALPHA MODELS
    Single-Period Composite IC of a Multi-Factor Model
    Optimal Alpha Model-An Analytical Derivation
    Factor Correlation versus IC Correlation
    Composite Alpha Model with Orthogonalized Factors
    Fama-Macbeth Regression and Optimal Alpha Model

    PORTFOLIO TURNOVER AND OPTIMAL ALPHA MODEL
    Turnover of Fixed-Weight Portfolios
    Turnover Due to Forecast Change
    Turnover of Composite Forecasts
    Information Horizon and Lagged Forecasts
    Optimal Alpha Model under Turnover Constraint
    Small Trades and Turnover

    ADVANCED ALPHA MODELING TECHNIQUES
    Contextual Modeling
    Mathematical Analysis of Contextual Modeling
    Empirical Examination of Contextual Approach
    Sector versus Contextual Modeling
    Modeling Nonlinear Effects

    FACTOR TIMING MODELS
    Calendar Effect-Behavioral Reasons
    Calendar Effect-Empirical Results
    The Earning Season Effect
    Macro Timing Models

    PORTFOLIO CONSTRAINTS AND INFORMATION RATIO
    Sector Neutral Constraint
    Long-Short Ration of Unconstrained Portfoli

  • Long-Only Portfolios
    The IR of Long-Only and Long-Short Portfolios

    TRANSACTION COSTS & PORTFOLIO IMPLEMENTATION
    Components of Transaction Costs
    Optimal Portfolios with Transaction Costs-Single Asset
    Optimal Portfolios with Transaction Costs-Multi Asset
    Portfolio Trading Strategies
    Optimal Trading Horizon
    Optimal Trading Strategies-Portfolios of Stocks
  • Biography

    Edward E. Qian, Ronald H. Hua, Eric H. Sorensen