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Equity Valuation and Portfolio Management by Harry M. Markowitz, Frank J. Fabozzi

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QUESTIONS

    1. Why is the portfolio sorts methodology used?
    2. What is an application of the portfolio sort methodology?
  1. How is the interpretation of a factor model using stock returns influenced by the specification of time lag of the (or no time lag) dependent variable?
  2. Explain some of the common inference problems that arise in cross-sectional regressions where the dependent variable is a stock's return.
    1. What are factor portfolios?
    2. What methodologies can be used to build these portfolios?
  3. What is the difference between in-sample and out-of-sample testing?

1 For a good overview of the most common issues, see Jonathan B. Berk, “Sorting out Sorts,” Journal of Finance 55, no. 1 (2000): 407–427 and references therein.

2 See Richard C. Grinold and Ronald N. Kahn, Active Portfolio Management: A Quantitative Approach for Providing Superior Returns and Controlling Risk (New York: McGraw-Hill, 1999), the authors discuss the differences between the t-statistic and the information ratio. Both measures are closely related in their calculation. The t-statistic is the ratio of mean return of a strategy to its standard error. Grinold and Kahn state the related calculations should not obscure the distinction between the two ratios. The t-statistic measures the statistical significance of returns while the IR measures the risk-reward trade-off and the value added by an investment strategy.

3 Andrew J. Patton and Allan Timmermann, “Monotonicity in Asset Returns: New Tests with Applications ...

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