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Fat-Tailed Dragon Asset Management. - Stock selection by scoring screens. Attribute No. 1: Trend in ROIC (Operating Income / Total Invested Capital) = ROIC t+1 - ROIC t Attribute No. 2: Price Momentum = (P t+1 - P t ) / P t Time Horizon (1982-1998) Sample data - PowerPoint PPT Presentation
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Fat-Tailed DragonAsset Management
- Stock selection by scoring screens
Attribute No. 1: Trend in ROIC (Operating Income / Total Invested Capital)
= ROIC t+1 - ROIC t
Attribute No. 2: Price Momentum
= (Pt+1 - Pt) / Pt
Time Horizon (1982-1998) Sample data Rebalance annually every Mar. 31st
Return On Invested Capital:
Average Return 4.28%, Volatility 20.48%
ROIC annual spread return
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Series1
PM annual spread return
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
spread return
Price Momentum:
Average Return 8.88%, Volatility 23.68%
4 Approaches:
Univariate - Top / Bottom 50 only Univariate - Double Score Univariate - Quintile Bivariate
Univariate - Top/Bottom 50Assign 79 to PM, 21 to ROIC based on optimization result. Average return: 10.85%, Volatility: 24.45%
Total Spread Return
-40%
-20%
0%
20%
40%
60%
80%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
spread return
Univariate - Double ScoreOnly buy stocks that receive positive score from both attributes and only sell stocks that receive negative score from both attributes.
Average return: 12.77%, Volatility: 28.69%
Flexible Spread Return
-40%
-20%
0%
20%
40%
60%
80%
100%
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
spread return
Univariate - QuintileBuy top 50, sell bottom 50. Average return: 10.66%, Volatility: 20.93%
Quintile Spread Return
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
spread return
Bivariate -First sort: keep top/bottom 120. Second sort: keep top/top 50 and bottom/bottom 50.
Average Return: 9.78%, Volatility: 22.65% Bivariate Spread Return
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
spread return
Summarytop/bottom 50 double score bivariate quintile
1.77% 3.69% 0.70% 1.58%
24.45% 28.69% 22.65% 20.93%
Average Excess
Volatility of Excess
Excess Return
-40%
-20%
0%
20%
40%
60%
80%
100%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
top/bottom 50
double score
bivariate
quintile
Key Findings / Conclusions:
Combining two attributes works better than using just one attribute.
4 approaches yield similar results and patterns.
The pattern is somewhat related with the pattern in the general movement of the market.
