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investment analysis portfolio

Questions and Answers of Investment Analysis Portfolio

6.4. It is possible to derive returns of many periodicities from returns of one periodicity. Suppose that we have estimated
6.3. One strength of the fundamental factor model over the economic factor model is that the data requirement is relatively small. What is the minimum data requirement to estimate the fundamental
6.2. Explain why economic factors such as GDP and behavioral factors such as consumer sentiment cannot be included in a fundamental factor model.
6.1. Describe the main steps in creating and estimating a fundamental factor model.
8. Calculate the correlation between the returns of the stocks in the investment universe.
7. Decompose the risk of the stock return into its diversifiable and nondiversifiable components.
6. Calculate each stock’s average return as the product of the factor premium and the vector containing the stock’s factor exposures.
5. If the estimation is not robust, try a different estimation method.
4. Check the robustness of the factor premium estimation by splitting the data into subsets and comparing the estimates for each subset. If the estimates are similar across subsets, the estimation is
3. Estimate the factor premium from a panel regression of the stock return on the factor exposure using either the OLS, MAD, or the GLS method.
2. Collect stock-return and factor-exposure data for the time period at each time interval.
1. Stock returns are estimated with the following equation: ri αi βi 1f1 … βiK fK i.
4. Decide on the time interval and time period of the data
3. Define the investment universe.
2. Determine the treatment of the risk-free rate.
1. Choose the factors for the model.
(c) Dixon’s test
(b) Grubb’s test
(a) Rosner’s test
5.20. For each test below, describe what it is used for and to what type of data it applies.
(c) Name a third way of dealing with these Z-scores that is mentioned in the chapter.
(b) What is an alternative way of handling such Z-scores?What is the common name given to this method?
5.19. (a) Why do portfolio managers who use the Z-score typically eliminate Z-scores with absolute values greater than 3?
5.18. When is the Z-score model, as used in Eq. (5.8), equivalent to the fundamental factor model? What does this mean?
(b) What are ˆδA and ˆδB of Eq. (5.8)? Is your conclusion the same as in part (a)?
(a) In which sector will a Z-score be relatively more important at forecasting returns?
5.17. Suppose that a portfolio manager is examining two sectors of the U.S. economy in which to invest. She constructs Z-scores relative to the sector for each stock. The cross-sectional volatility
(c) What does it mean when score 0, and what does it imply for the conditional excess expected return? What would the regression coefficient ˆδ be equal to if this were true?
b) What does it mean when volatility 0, and what does it imply for the conditional excess expected return?What would the regression coefficient ˆδ be equal to if this were true?
(a) What does it mean when IC 0, and what does it imply for the conditional excess expected return? What would the regression coefficient ˆδ be equal to if this were true?
. Some people express the regression equation ri,t γδ zi,t1 i,t as something called the forecasting rule of thumb, which states that the expected return of the stock conditional on the
5.15. Suppose that a portfolio manager is interested in whether an aggregate Z-score is useful in forecasting the return of stocks in the next period. Suppose that he takes a month of stock returns
(c) Describe the strengths and weaknesses of each method.
(b) What are three methods to convert an aggregate Z-score of a stock into an expected return or α for use in portfolio construction?
(a) What problem does this requirement pose when using solely the aggregate Z-score to rank favorable stocks?
5.14. Quantitative portfolio managers generally manage their portfolios versus a benchmark. Thus they usually require a set of expected returns and risks to construct a portfolio.
5.12. Given the similarity in the signal between the factor group aggregate Z-score and the regular Z-score, why would a quantitative portfolio manager ever use the former?
5.11. Suppose a portfolio manager has created Z-scores for all stocks in the universe for a given factor. What is the probability that a stock with a Z-score of 2 or greater is observed in the
5.10. A portfolio manager is building his portfolio of stocks. His benchmark is the S&P 500. He will focus on three factors to build his portfolio of stocks. These factors are P/B ratio, P/E ratio,
5.9. What is the optimal aggregate Z-score? How do you come up with it?
(c) Why might some people say that this method is not really QEPM?
(b) What is the danger with using this method of weighting?
5.8. (a) What is meant by an ad hoc aggregate Z-score?
5.7. What is the Z-score, and how is it related to simultaneous stock screening?
. What are the advantages of simultaneous stock screening over sequential stock screening?
5.5. What types of factor screening are very common among the famous portfolio managers whom we discuss in this chapter?
5.4. There are many ways for a business to increase its earnings.One way is to increase the net profit margin. Another way is to increase the number of stores in operation. How might one measure a
of a company?
5.2. Compare our Lakonishik-inspired screen with our Piotroskiinspired screen. How are they similar? How are they different?
. What is stock screening used for in QEPM?
2. Decide which factors to include in each factor group. For example, the manager might believe that P/B, P/E, and P/S ratios are all factors that determine value and place those in the valuation
1. Determine the number of factor groups M. For example, if M 4, we might have a valuation composite, a profitability composite, a financial soundness composite, and a technical composite. These
4.20. What might the Kendall statistic or other rank-correlationstatistic be used for?
4.19. True or false? The stepwise regression technique is very powerful in identifying the optimal combination of factors for use in a stock-return model. Portfolio managers always should use it.
4.18. Why might univariate factor tests not be sufficient to determine the factors in a fundamental model?
(b) an economic factor model?
(a) a fundamental factor model?
4.17. What kinds of tests or techniques can an analyst use to choose factors for
4.16. Does investing in socially responsible companies hurt portfolio returns?
(e) What are standardized unanticipated earnings (SUE)?Why might this be useful as a factor? (Hint: Use the idea of information diffusion in your explanation.)
(d) Downgrades of a stock by some analysts probably serve as more useful factors than downgrades of a stock by all analysts.
(c) A change in analyst recommendation describes stock returns better than the recommendation itself (strong buy, buy, sell, etc.) does.
(b) Analyst factors are less useful now owing to the fair disclosure rules proposed by the SEC in 2000.
(a) Analyst factors are very useful because they incorporate a lot of analysis of a company into one number.
4.15. Many factors are lumped into an area called alternative factors.Please respond to each of the statements below.
4.14. A quantitative manager is collecting data for use with a stock-return model. He finds that there is a positive relationship between this month’s inflation and stock returns. What might you be
(b) What is one of the biggest benefits of using economic factors in stock-return models?
13. (a) What are three of the biggest drawbacks of using macroeconomic factors?
(d) Some technicians would argue that the Bollinger band should not be used in isolation but in conjunction with other indicators, such as the RSI. Given this philosophy, would you buy or sell or or
(c) Using the same data, compute the relative strength index (RSI) for each of those days, assuming a nine-day Wilder period.
(b) Suppose that the quantitative portfolio manager is a contrarian. Thus she believes that markets overreact to information. Should she buy or sell or do nothing on each of those days according to
(a) Compute the mean, upper, and lower bands of a Bollinger band with two standard deviations (i.e., l 2)and a 10-day rolling window (i.e., k 10) for the dates July 26, 2004–July 29, 2004.
4.12. Given the data in the following table on the stock RRI, please do the following:
(c) Which type of quantitative portfolio manager is likely to use a technical indicator as a factor, one who rebalances monthly or one who rebalances quarterly?
(b) Name four types of technical factors.
(a) What is the main reason for using technical factors?
4.11. Technical factors are being used increasingly in QEPM.
(b) What do you think is more relevant in this regard, average daily trading volume, market capitalization, or float-weighted capitalization? Explain.
4.10. (a) Why might fundamental liquidity factors be important for QEPM?
4.9. All else equal, would you prefer a low D/E ratio or a high D/E ratio company in your portfolio? What are some other measures of fundamental financial risk?
4.8. What might you expect to be more effective at explaining stock returns, gross profit margin or the change in gross profit margin? Explain.
4.7. Why would fundamental solvency factors be included in a stock-return model?
(b) Rearrange this expression so as to obtain the implicit growth rate of earnings implied by the actual P/E ratio of the stock and other parameters.
(a) Derive an expression for the P/E ratio in terms of the payout ratio k, the required rate of return on equity rce and the growth rate of earnings g.
4.6. Using concepts from Appendix B on the accompanying CD with this book on the DDM and this chapter, answer the following questions.
4.5. What would be more appropriate for a P/E ratio factor, a trailing P/E ratio or a forward P/E ratio? Explain.
4.4. Suppose that there is a group of stocks, group A, with an average P/B ratio that is lower than the industry average, and another group of stocks, group B, that has a P/B ratio that is higher
4.3. What are some common fundamental valuation factors?
4.2. What are the four basic categories of factors in QEPM?
4.1. What is a factor, and why is it important in QEPM?
(c) Eugene Fama might be heard saying the following:“I still would rather not use the type of factor in part (a)because it does not perform well out of sample.” What does he mean? Is he right?
(b) Give one reason why this is so.
(a) Which type of factor is more theoretically justified?
3.16. Economic and fundamental factors are both used in practice.
(e) Intuitive appeal
(d) Data requirements
(c) Ease of implementation
(b) Factor accommodation
(a) Theoretical reasoning
3.15. Below we list some criteria for selecting a stock-return model.Indicate which factor model (fundamental or economic) best meets each criterion.

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