Encyclopedia of Financial Models II

Basics of Quantitative Equity Investing

PAUL BUKOWSKI, CFA, FCAS

Executive President, Head of Equities, Hartford Investment Management

Abstract: Quantitative equity investing is one method used by investors to identify attractive stocks and gain a competitive advantage. In contrast to fundamental investors who focus on a single company at a time, quantitative investors focus on stock characteristics. Quantitative investors look for sources of information or company characteristics that help to explain why one stock outperforms another stock. They assemble a group of characteristics into a unique stock selection model, which is the core of the quantitative investment process. The quantitative investment process can be divided into three main phases: research, portfolio construction, and monitoring. During the research phase, the stock selection model is created. During the portfolio construction phase, the quantitative investor uses the stock selection model to create a live portfolio. Finally, during the monitoring phase, the quantitative investor makes sure the portfolio is performing as expected and modifies it as needed. While quantitative investing can be very different from fundamental investing, they are complementary and combined can lead to a more well-rounded overall investment approach.

The goal of this entry is to provide the basics of quantitative equity investing and an explanation of the quantitative investing process. More specifically, I focus on the following ...