Lecture 7 (Pedersen Chapter 9)

Question 1

Quantitative equity investing

Answer 1

model-driven
equity investing, performed, for instance, by equity market neutral hedge
funds.

Question 2

Advantages of quantitative investing

Answer 2

• Can be applied to a broad set of stocks, yielding significant diversification

-the quant’s modeling rigor may largely overcome the behavioral biases that often influence human judgment, perhaps those very biases that create the trading opportunities in the first place.

• the quant’s trading principles can be backtested using
  historical data

Question 3

Three types of quant strategies

Answer 3

Fundamental
Statistical
High-Frequency

Question 4

Fundamental Quant

Answer 4

• Seeks to apply fundamental analysis in a systematic way
• Based on economic theory and finance along with statistical data analysis
• Typically has a turnover of days to months and has a high capacity
• Ex ante
• Identifies high-expected return stocks

Question 5

Statistical Quant

Answer 5

• Seeks to exploit relative mispricings between closely related stocks
• Based on an understanding of arbitrage relations and statistics
• Has a turnover measured in hours or days and a smaller capacity
• Determined gradually
• Seeks to buy mispriced stocks but may terminate the trading scheme before completion if the prices moved adversley

Question 6

High frequency trading

Answer 6

• Based on statistics, information processing, and engineering
• Success depends partly on the speed in which they can trade
• Often trading on temporary “true” arbitrages, temporary mispricing
• Turnover in seconds and has the lowest capacity
• Let the market determine their trades
• Submit limit orders to both buy and sell to several exchanges, letting the market determine which ones are being hit

Question 7

Fundamental quant trading factors

Answer 7

• Value and Momentum
• (Also Earnings quality, management quality, and size)

Question 8

what is the measure of a quants performance value

Answer 8

Stock’s fundamental value (present value of future cash flows) and comparing it to the stock’s current market value

ex: buy with high ratios, sell those with low

works for other ratios such as earnings/price and dividends/price