You are a US long-only quantitative portfolio manager. In Portfolio123, create a ranking system based on the following combination of signals:
i) 40% Value, using:
i.1) 60% EV/EBITDA: EV/Eval(EBITDATTM>0,EBITDATTM,NA)
i.2) 20%: Earnings Yield from Earnings Forecasts: 0.5*(1/ ProjPECurFY)+0.5*(1/ ProjPENextFY)
i.3) 20%: Price to Sales: Pr2SalesTTM ii) 30% Quality, using:
ii.1) 50% in Gross Profitability: GrossProfitTTM/AstTotQ
ii.2) 50% in Piotroski Score: PiotFScore iii) 30% Price Trends, using:
iii.1) 50% Industry Momentum 3-months: Pr13W%ChgInd
iii.2) 50% Industry Momentum 6-months: Pr26W%ChgInd You should know which way the arrows point. Use Percentile NAs Negative (Portfolio123’s default option).
a) Backtest the performance of the ranking system above using: Universe: S&P1500 Benchmark: S&P1500 Rebalancing Frequency: every 4 weeks Number of buckets= 10 Slippage=0, minimum price = 3, Sector=All, Long Copy-paste the bar chart with annualized returns over MAX time period.
b) Explain in as much detail as you can the calculations Portfolio123 does to generate the bar charts in item a).
c) Find the vector E[α] as of February 21 2015 using the ranking system above. Use a standard deviation of 2% per year. The spreadsheet Week3_Quiz_Q2 has useful data to answer this question.
d) IF you had a covariance matrix V for all stocks in the S&P 1500 Universe, describe how you would use Excel to find the long-only (i.e., no shorting allowed) portfolio that invests in the top 200 stocks according to your ranking system and hits a target Active Risk of 4% per year.