Equity Valuation and Portfolio Management

KEY POINTS

• Investing begins with processing many different types of information to find the most attractively priced assets. Fundamental and quantitative investors differ in their approach to the available information. The fundamental investor's primary focus is on a single company at a time, while the quantitative investor's primary focus is on a single characteristic at a time.
• Quantitative and fundamental approaches are complementary. By combining the two approaches, you can obtain a more well-rounded investment process including breadth and depth in analysis, facts based with human judgment, a past and future perspective of a company, and a more well-rounded view of risk and performance of the portfolio.
• The quantitative equity investment process is made up of three phases: research, portfolio construction, and monitoring. During the research phase, the stock selection model is created. During the portfolio construction phase, the quantitative investor “productionalizes” the stock selection model or gets it ready to invest in a live portfolio. Finally, during the monitoring phase, the quantitative investor makes sure the portfolio is performing as expected.
• At the heart of the quantitative equity investment process is the stock selection model. The model includes those characteristics that are best at delineating the highest from lowest returning stocks. Models can be created for industries, sectors, or styles.
• Two common metrics used to judge a characteristic's effectiveness ...