Quantitative Equity Portfolio Management: Modern Techniques and Applications, 1st Edition (Hardback) book cover

Quantitative Equity Portfolio Management

Modern Techniques and Applications, 1st Edition

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

Chapman and Hall/CRC

464 pages | 81 B/W Illus.

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Hardback: 9781584885580
pub: 2007-05-11
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Description

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.

Reviews

"This book is a must have for quantitative equity managers and it provides a step-by-step illustration of how to build a superior, repeatable investment process. By combining academic research with practical implementation considerations, the book outlines the theoretical foundation of various market anomalies such as value, momentum, quality, calendar effect, and analyzes their actual performance with real world portfolios under institutional setting. The book can also serve as a valuable text and reference for students and academic researchers in the field. With rigorous mathematical analytics, the book goes beyond the traditional efficient frontier paradigm. For example, the objective of maximizing information ratio as a performance measure extends traditional academic research settings to make it more practically relevant. This results in some subtle yet critical analytical insights regarding quantitative factors and strategies. In addition, the mathematical treatment of the nonlinear factor effect and contextual factor model is intuitive and based on fundamental understanding of the market dynamics."

-Li Jin, Assistant Professor of Finance, Harvard Business School, Boston, Massachusetts, USA

"Quantitative Equity Portfolio Management sets a new standard for comprehensive assessments of quantitative techniques. The authors' experience as practitioners brings to light critical issues of implementation, such as transaction costs and turnover, which have not previously achieved sufficient attention. Overall, the depth, rigor, and elegance of the authors' approach to the topic make it a valuable resource for investment professionals everywhere."

-Bruce MacDonald, Director, Asset Allocation and Risk Analysis, University of Virginia Investment Management Company, Charlottesville, USA

"Fans of Grinold and Kahn's standard text Active Portfolio Management will love the new book Quantitative Equity Portfolio Management by Qian, Hua, and Sorensen. It reflects the latest, most up-to-date thinking on portfolio theory, risk and alpha modeling, transaction costs, and multiperiod strategies. The authors are expert, proven practitioners of the art and active researchers in the field, and have provided an essential handbook covering both theory and many practical implementation issues not available in existing books. This is a must-have addition to the bookshelf of professional portfolio managers and students of portfolio management alike. I also expect this book will inspire faculty in quantitative finance and financial engineering to add more quantitative portfolio management to the usual option pricing material that students learn on their way to careers in the investments industry."

-Alec N. Kercheval, Associate Professor, Director of Financial Mathematics, Florida State University, Tallahassee, USA

"… a superb book for the sophisticated investment practitioner. It brings together rigorous derivation and practical insight across the complete spectrum of topics needed for an intelligent investment process. Most importantly, it brings forward detailed methodologies for dealing with subtle, but critical subjects such as alpha decay and optimal trading strategies that are beyond the scope of other texts. For many of us in the field, our only regret about the book will be that we did not write it."

-Dan diBartolomeo, President, Northfield Information Services, Inc., Boston, Massachusetts, USA

Table of Contents

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

  • About the Series

    Chapman and Hall/CRC Financial Mathematics Series

    Learn more…

    Subject Categories

    BISAC Subject Codes/Headings:
    BUS027000
    BUSINESS & ECONOMICS / Finance
    MAT000000
    MATHEMATICS / General
    MAT029000
    MATHEMATICS / Probability & Statistics / General