Equity Valuation and Portfolio Management

KEY POINTS

• The first decade of the twentieth century witnessed an increasing use of quantitative models in investment management.
• Initially used primarily in passive management and risk management, models are increasingly used in active management and to engineer innovative investment strategies such as the use of optimized indexes and dynamic asset allocation. One reason many investment firms built up quantitative teams was to have the ability to extend the product offering to new products for which there is demand, such as exchange-traded funds.
• The performance of models has improved; this improved performance has been particularly effective in active strategies, where it has helped reduce risk.
• Factor models are the primary methodology of financial modeling in investment management; they are used to forecast returns and to compute exposure to risk factors. Momentum and reversal models, cash flow-based models, and behavioral models are also widely used. It is likely that multiple models suitable for different market conditions are needed and we begin to see the deployment of adaptive models able to adapt to changing market conditions.
• Thanks to progress in robust estimation techniques and robust optimization methods, portfolio optimization is now being used in asset management.
• Execution has been impacted by the availability of tick-by-tick data and fast computer and communications technology, making program trading and subsequently high-speed trading the new “best execution.” ...