For the purposes of this discussion, assume that you have been hired as a portfolio manager with quantitative investing firm. Assume that under the standards of the firm, a good set of quantitative signals exists. Discuss: Think for the perspective of an investment fund such as Acadian Asset Management (not a financial advisor).

How do professional managers control the risk in their portfolios?

How do quantitative investors choose portfolios?

In class we discussed the Grinold-Kahn procedure with a standard deviation of 2% per year. Why did we choose 2% per year? Do you envision circumstances in which a quantitative manager would choose a standard deviation different from 2% in the Grinold-Kahn procedure?

Hint: i) Consider two managers managing funds with different Universes; ii) Consider one manager managing a given fund at two different points in time (e.g., peak of dot-com bubble vs. normal period).