- Why is the portfolio sorts methodology used?
- What is an application of the portfolio sort methodology?
- 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?
- Explain some of the common inference problems that arise in cross-sectional regressions where the dependent variable is a stock's return.
- What are factor portfolios?
- What methodologies can be used to build these portfolios?
- 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 ...