comparing stock sorting methodologies
DESCRIPTION
Comparing Stock Sorting Methodologies. Strategic Partners 27 Feb 04. Current Sorting Methodologies. Independent Sparse buckets Layered Equal # of stocks/bucket Bi-variate Simultaneous Sorting. Independent Sort. Sequential Sort. 5. 5. 5. FACTOR 2. FACTOR 1. FACTOR 1. 4. 4. 4. 5. - PowerPoint PPT PresentationTRANSCRIPT
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Comparing Stock Sorting Methodologies
Strategic Partners
27 Feb 04
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Current Sorting Methodologies
Independent Sparse buckets
Layered Equal # of stocks/bucket
Bi-variate Simultaneous Sorting
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FA
CT
OR
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CT
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OR
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234
1
FACTOR 2
Independent Sort Sequential Sort
Score i = (wt1)*(Factor1_Rankingi)
+ (wt2)*(Factor2_Rankingi)
Score i = (wt1)*(Factor1_Rankingi)
+ (wt2)*{Factor2_Rankingi | Factor1_Rankingi}
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Factor 2
Fac
tor
1
1
2
3
1 2 3
23 1
1
2
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3
Independent Sort Sequential Sort
Correlation (Factor1_Ranking, Factor2_Ranking) = 0
Fac
tor
1
Factor 2
1
2
3
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Factor 2
Fac
tor
1
1
2
3
1 2 3
23 1Independent Sort Sequential Sort
Correlation (Factor1_Ranking, Factor2_Ranking) = 1
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Factor 2
Fac
tor
1
1
2
3
1 2 3
23 1Independent Sort Sequential Sort
Correlation (Factor1_Ranking, Factor2_Ranking) = -1
Factor 2
Fac
tor
1
1
2
3
1 2 3
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Data
Universe Large Cap (>500 Million) Listed on NYSE or NASDAQ
Variables Fundamental Technical Debt Structure
Correlation Impact
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Comparing Methodologies
Different Factors Weighting
Equal Weight vs. Value Weight Time Horizon
Value vs. Growth Market
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Factor Selection
Factor Comparison
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
-1- -2- -3- -4- -5-
Portfolio
Retu
rn(%
)
PE D_E DownRev ROA UpRev
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CT
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25
234
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FACTOR 1
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FA
CT
OR
1
5
234
1
FACTOR 2
Importance of Sequence
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Impact of Sort Order
Sort Order Comparison
-0.5
0
0.5
1
1.5
2
2.5
PE_Lev Lev_PE
Sort Order
Ret
urn
Dif
fere
nce
(5-
1)(%
)
EW VW
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-1- -2- -3- -4- -5- -1- -2- -3- -4- -5-
Cumulative annual returns - (index = 100 each year)
2001 98.2 99.5 100.3 100.9 101.1 96.2 98.8 99.1 100.0 100.0
2002 97.8 98.5 99.3 99.6 100.6 97.4 98.2 98.8 98.9 100.3
2003 104.1 103.0 103.2 103.3 104.6 104.2 101.8 102.8 102.7 103.5
2001 1.0 2.0 3.0 4.0 5.0 1.0 2.0 3.0 4.0 5.0
2002 1.0 2.0 3.0 4.0 5.0 1.0 2.0 3.0 4.0 5.0
2003 4.0 1.0 2.0 3.0 5.0 5.0 1.0 3.0 2.0 4.0
Average relative performance 2.0 1.7 2.7 3.7 5.0 2.3 1.7 3.0 3.3 4.7
Portfolios - equal weighted Portfolios - value weighted
Screening Results PE/Leverage Layered Sort
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-1- -2- -3- -4- -5- -1- -2- -3- -4- -5-
Cumulative annual returns - (index = 100 each year)
2001 99.2 99.2 99.4 99.8 99.7 98.5 98.9 98.0 98.2 98.0
2002 98.2 98.4 98.5 99.2 99.0 98.5 98.0 98.5 98.0 98.3
2003 104.4 103.7 103.9 103.6 104.0 103.7 102.8 102.7 102.6 103.5
2001 2.0 1.0 3.0 5.0 4.0 4.0 5.0 2.0 3.0 1.0
2002 1.0 2.0 3.0 5.0 4.0 4.0 2.0 5.0 1.0 3.0
2003 5.0 2.0 3.0 1.0 4.0 5.0 3.0 2.0 1.0 4.0
Average relative performance 2.7 1.7 3.0 3.7 4.0 4.3 3.3 3.0 1.7 2.7
Portfolios - equal weighted Portfolios - value weighted
Screening Results Leverage/PE Layered Sort
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Future Research
Use longer time horizon to incorporate different markets
Compare Bi-variate to Layered and Independent Screening
Use Deciles rather than Quintiles Migration tracking
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T-5
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T-4
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T-1
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T-2
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T-3
Stock Sorting with Migration Tracking
adjusted Score = Score + Migration adjustment