Trading

Question 1

What is the objective of Trading

Answer 1

Timing the market in the short run. Identify small inefficiencies and explore them.

Question 2

What is the Adaptive Market Hypothesis?

Answer 2

Every explorable opportunity will fade away as more investors explore it.

Question 3

Name the three different contrasts in Trading Styles

Answer 3

Opportunistic (trading specific events) x Systematic (works over time)
Subjective x Quantitative
Technical x Fundamental

Question 4

Explain Technical Analysis

Answer 4

Exploring patters by assuming weak EMH

Question 5

Name known types of technical analysis

Answer 5

TF, MR, Supports and Resistances…

Question 6

Explain Fundamental Analysis

Answer 6

Assessing real asset values through more data than prices. (Using macro and accounting data)

Question 7

Name Value factors

Answer 7

Price-to-earnings
Dividend Yield
EV/EBITDA
ROE

Question 8

Name Growth factos

Answer 8

PE growth
Price/Sales
Asset Growth

Question 9

Name Macro factors

Answer 9

CPI
GDP
Unemployment
Budget Deficit

Question 10

To replicate an index you can:

Answer 10

• Replicate manually (buy all companies in the index)
• Buy an ETF that tracks it (subject to tracking error and operating expenses)
• Buy futures (pay an interest rate and receive a dividend yield)

Question 11

How do Hedge Funds invest in Futures

Answer 11

They pay the margin and invest the rest at the rf rate.

Example: Asset costs 225k, margin is 10k, so they pay the margin and put the rest on the rf.

Need scalability, not available to retailers.

Question 12

Explain January Effect: What is it? Why does it happen? How can we take advantage?

Answer 12

January returns tend to be higher than other months.
Possible explanation is: investors sell losing positions in December to obtain a tax discount; Window dressing.
Should go long from the end of December until the end of January.

Question 13

Explain Day-of-the-week Effect: What is it? Why does it happen? How can we take advantage?

Answer 13

On Mondays returns tend to be lower.
Explanation: Investor sentiment, data announcements.
Short on Mondays. Use as filter for other strategies.

Question 14

Explain End-of-Month Effect: What is it? Why does it happen? How can we take advantage?

Answer 14

Last 4 days and first 3 contain most of a months returns.
Explanation: Salaries and pensions result in inflows, window dressing.
Go long 3/4 days before month ends and exit 7 days later.

Question 15

Explain Holiday Effect: What is it? Why does it happen? How can we take advantage?

Answer 15

Returns are higher after a holiday.
Explanation: Catching up after lost days.
Go long before holiday and exit after it is finished.

Question 16

Explain Time-of-day Effect: What is it? Why does it happen? How can we take advantage?

Answer 16

Most returns are generated over night.
Day traders go home squared.
Go long overnight, specially if the market closed downward.

Question 17

Explain Christmas Rally Effect: What is it? Why does it happen? How can we take advantage?

Answer 17

Returns are higher during holiday season.
Explanation: multiple holidays, end-of-month, end-of-year
Long mid-December and exit early January.

Question 18

Explain Sell in May and Go Away Effect: What is it? Why does it happen? How can we take advantage?

Answer 18

Most returns are concentrated in October-April.
Explanation: Earnings/Dividends periods.
Go long in October and exit in April.

Question 19

Explain Momentum Effect: What is it? Why does it happen? How can we take advantage?

Answer 19

Past winners outperform past losers (3-6 months)
Explanation: Slow diffusion of information, herd behavior.
Buy winners and short losers; deciles (hold top 10 winners)

Question 20

Why are interest rates bad for firms?

Answer 20

Slow the economy
Decrease terminal values

Question 21

Compare interbank rates to central bank rates:

Answer 21

Interbank rates are higher since they bear higher risk of default

Question 22

Why do CBs change rates?

Answer 22

Provide or take away liquidity from the market.

Question 23

Is the Yield Curve slope an effective predictor of stock returns?

Answer 23

Yes.

Question 24

If yield curve steepens, what happens to equities?

Answer 24

Forward rates rise, so equities fall (Think future CFs discounted at higher rates, at least higher than the near future)

Question 25

Low-Sharpe combination can lead to good sharpe?

Answer 25

Yes, diversification

Question 26

Name stuggles of working with fundamental data

Answer 26

Meaningfulness, reliability, comparability, timeliness

Question 27

What are the most used equity factors?

Answer 27

Market (Betas)
Value (High-minus-Low)
Size (SMB)
Momentum
Volatility
Quality

Question 28

Problem with using Macro factors?

Answer 28

Frequently lagging, when they go public, are already discounted

Question 29

Mixing Factors, how should you proceed?

Answer 29

NO joining ranks (rank + rank)
Filter for factor and then rank (remember assignment)
Combining different strategies better than joining (not as good as filtering) (rank or rank)

Question 30

Take into consideration when using factors for equities:

Answer 30

Different factors for different industries.

Banks: Price to Book (assets)
Tech: Price to Sales Growth
Industrials: EV/EBITDA
Capital Intensive: FCF

Question 31

Volatility factor to generate signal to buy/sell equity?

Answer 31

Volatility smile skewness

Question 32

Other techniques to take advantage of factors?

Answer 32

Factor analysis / PCA to generate own factors
Machine Learning to select most relevant factors
Surprise factors (Expected vs. Actual) - Earnings beat

Question 33

Issues to look for in a trading strategy (fundamentals):

Answer 33

Announcement dates (forward looking bias)
Accounting standards
Adjust for corporate events
Periodicity of events
Window dressing
Index Changes (survivorship bias)

Question 34

How can we improve fundamental data backtesting?

Answer 34

Using specific industries