Quantitative Equity Portfolio Management: An Active Approach to Portfolio Construction and Management by Ludwig B. Chincarini

Quantitative Equity Portfolio Management: An Active Approach to Portfolio Construction and Management by Ludwig B. Chincarini

PART I
An Overview of QEPM

Modern financial theory has long described the stock
market as a place that rewards investors who take
calculated risks over the long run. Today’s understanding of
the market, however, argues for a different kind of approach
to risk-taking from the kind that was popular just a couple of
decades ago. The conventional wisdom at that time was
that stock returns related only to stocks’ correlations with
the total market and that the best investment strategy was
simply to follow the market. More recent insights show that
other sources of risk fuel stock returns and that the market
rewards investors who seek them.
More specifically, recent work in finance finds that stock
returns, over time periods of a year or more, are fairly
predictable with certain groups of factors. Prices no longer
seem to zigzag randomly in Brownian motion. Rather, when
viewed through the right prism of risk factors, they follow
decipherable patterns. These additional insights in financial
theory not only reveal the possibility of profiting from active
investment strategies, but they also make the case for a
specifically quantitative approach. If it takes multiple factors
to predict stock returns most accurately, then quantitative
models of stock returns are needed to identify and combine
factors efficiently. If returns are somewhat predictable over
the long run, then stable quantitative models should work
more reliably than picking individual stocks intermittently on
qualitative information. The current state of technology,
which supports data-heavy quantitative research and
complex trading strategies, makes it possible to put these
ideas into practice.
Quantitative equity portfolio management (QEPM) is what
we call the approach to portfolio management that takes full
advantage of today’s better understanding of the markets
and greater technological capacity for sophisticated
investing. QEPM is a broad and flexible umbrella that
encompasses as many individual strategies as managers
can develop with the set of quantitative methods that we
explain in this book. The commonality of all the various
QEPM applications is the discipline and accuracy that
mathematics lend to the pursuit of returns and the control
of risk. In the first three chapters we will introduce you to
QEPM, why and how it works, and the essential framework
on which it operates.

Quantitative Equity Portfolio Management: An Active Approach to Portfolio Construction and Management by Ludwig B. Chincarini