Equity Valuation and Portfolio Management
by Fabozzi, Frank J.; Markowitz, Harry M.Edition: 1st
Format: Hardcover
Pub. Date: 2011-10-04
Publisher(s): Wiley
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Summary
A detailed look at equity valuation and portfolio management Equity valuation is a method of valuing stock prices using fundamental analysis to determine the worth of the business and discover investment opportunities. In Equity Valuation and Portfolio Management Frank J. Fabozzi and Harry M. Markowitz explain the process of equity valuation, provide the necessary mathematical background, and discuss classic and new portfolio strategies for investment managers. Divided into two comprehensive parts, this reliable resource focuses on valuation and portfolio strategies related to equities. Discusses both fundamental and new techniques for valuation and strategies Fabozzi and Markowitz are experts in the fields of investment management and economics Includes end of chapter bullet point summaries, key chapter take-aways, and study questions Filled with in-depth insights and practical advice, Equity Valuation and Portfolio Management will put you in a better position to excel at this challenging endeavor.
Author Biography
Frank J. Fabozzi, PhD, CFA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC in August 2011, he held various professorial positions in finance at the Yale School of Management from 1994 to 2011 and was a visiting professor of finance and accounting at the MIT Sloan School of Management from 1986 to 1992. He is also Editor of the Journal of Portfolio Management.
Harry M. Markowitz, PhD, is a consultant in the area of finance. In 1990, he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his groundbreaking work in portfolio theory. In 1989, he received the John von Neumann Theory Prize of the Institute for Operations Research and the Management Sciences for his work in portfolio theory and other applications of mathematics and computers to business practice.
Table of Contents
| Preace | p. xiii |
| About the Editors | p. xxiii |
| Contributing Authors | p. xxv |
| An Introduction to Quantitative Equity Investing | p. 1 |
| Equity Investing | p. 1 |
| Fundamental Vs. Quantitative Investor | p. 2 |
| The Quantitative Stock Selection Model | p. 7 |
| The Overall Quantitative-Investment Process | p. 9 |
| Research | p. 9 |
| Portfolio Construction | p. 18 |
| Monitoring | p. 21 |
| Current Trends | p. 22 |
| Key Points | p. 23 |
| Questions | p. 24 |
| Equity Analysis Using Traditional and Value-Based Metrics | p. 25 |
| Overview of Traditional Metrics | p. 25 |
| Price Multiples | p. 32 |
| Fundamental Stock Return | p. 36 |
| Traditional Caveats | p. 38 |
| Overview of Value-Based Metrics | p. 39 |
| Key Points | p. 58 |
| Appendix: Case Study | p. 60 |
| Questions | p. 69 |
| A Franchise Factor Approach to Modeling P/E Orbits | p. 71 |
| Background | p. 72 |
| Historical Data Observations | p. 75 |
| Formulation of the Basic Model | p. 81 |
| P/E Myopia: The Fallacy of a Stable P/E | p. 85 |
| Two-Phase P/E Orbits | p. 91 |
| Franchise Valuation under Q-Type Competition | p. 96 |
| Franchise Labor | p. 91 |
| Key Points | p. 101 |
| Questions | p. 102 |
| Relative valuation Methods for Equity Analysis | |
| Basic Principles of Relative Valuation | p. 106 |
| Hypothetical Example | p. 115 |
| Key Points | p. 123 |
| Questions | p. 124 |
| Valuation over the Cycle and the Distribution of Returns | p. 125 |
| The Link Between Earnings and Returns | p. 126 |
| The Phases Can Be Interpreted in Relationship to the Economy | p. 132 |
| Asset Class Performance Varies across the Phases | p. 137 |
| Incorporating Cyclically into Valuations | p. 139 |
| Appendix Dates and Returns of the Phases | p. 142 |
| Key Points | p. 146 |
| Questions | p. 146 |
| An Architecture for Equity Portfolio Management | p. 147 |
| Architectural Building Blocks | p. 148 |
| Traditional Active Management | p. 151 |
| Passive Management | p. 156 |
| Engineered Management | p. 157 |
| Expanding Opportunities | p. 160 |
| The Risk-Return Continuum | p. 163 |
| The Ultimate Objective | p. 167 |
| Key Points | p. 168 |
| Questions | p. 169 |
| Equity Analysis in a Complex Market | p. 171 |
| An Integrated Approach to a Segmented, Market | p. 172 |
| Disentangling | p. 176 |
| Constructing, Trading, and Evaluating Portfolios | p. 184 |
| Profiting from Complexity | p. 186 |
| Key Points Questions | |
| Survey Studies of the Use of Quantitative Equity Management | p. 189 |
| 2003 Intertek European Study | p. 189 |
| 2006 Intertek Study | p. 197 |
| 2007 Intertek Study | p. 205 |
| Challenges for Quantitative Equity Investing | p. 224 |
| Modeling After the 2007-2009 Global Financial Crisis | p. 226 |
| Key Points | p. 228 |
| Questions | p. 229 |
| Implementable Quantitative Equity Research | p. 231 |
| The Rise of Econophysics | p. 233 |
| A General Framework | p. 235 |
| Select a Sample Free from Survivorship Bias | p. 238 |
| Select a Methodology to Estimate the Model | p. 239 |
| Risk Control | p. 246 |
| Key Points | p. 248 |
| Questions | p. 249 |
| Tracking Error and Common Stock Portfolio Management | p. 251 |
| Definition of Tracking Error | p. 251 |
| Components of Tracking Error | p. 254 |
| Forward-Looking vs. Backward-Looking Tracking Error | p. 255 |
| Information Ratio | p. 256 |
| Determinants of Tracking Error | p. 257 |
| Marginal Contribution to Tracking Error | p. 261 |
| Key Points | p. 262 |
| Questions | p. 263 |
| Factor-Based Equity Portfolio Construction and Analysis | p. 265 |
| Factor-Based Trading | p. 266 |
| Developing Factor-Based Trading Strategies | p. 269 |
| Risk to Trading Strategies | p. 271 |
| Desirable Properties of Factors | p. 273 |
| Sources for Factors | p. 273 |
| Building Factors from Company Characteristics | p. 274 |
| Working with Data | p. 275 |
| Analysis of Factor Data | p. 283 |
| Key Points | p. 287 |
| Questions | p. 289 |
| Cross-Sectional Factor-Based Models and Trading Strategies | p. 291 |
| Cross-Sectional Methods for Evaluation of Factor Premiums | p. 292 |
| Factor Models | p. 300 |
| Performance Evaluation of Factors | p. 310 |
| Model Construction Methodologies for a Factor-based Trading Strategy | p. 317 |
| Backtesting | p. 328 |
| Backtesting Our Factor Trading Strategy | p. 330 |
| Key Points | p. 331 |
| Appendix: The Compustat Point-in-Time, IBES Consensus Databases and Factor Definitions | p. 333 |
| Questions | p. 337 |
| Multifactor Equity Risk Models and Their Applications | p. 339 |
| Motivation | p. 340 |
| Equity Risk Factor Models | p. 342 |
| Applications of Equity Risk Models | p. 350 |
| Key Points | p. 370 |
| Questions | p. 371 |
| Dynamic Factor Approaches to Equity Portfolio Management | p. 373 |
| Methods of Active Management | p. 376 |
| Modeling | p. 385 |
| Implementation | p. 392 |
| Key Points | p. 395 |
| Questions | p. 395 |
| A Factor Competition Approach to Stock Selection | p. 397 |
| The Problem | p. 397 |
| The Solution | p. 403 |
| Which Factors Get Picked? | p. 407 |
| Does the Alpha Repair Process Work? | p. 408 |
| Key Points | p. 411 |
| Questions | p. 412 |
| Avoiding Unintended Country Bets in Global Equity Portfolios | p. 413 |
| Country Membership and Individual Stock Returns | p. 414 |
| Ways to Build Active Global Portfolio | p. 416 |
| Studying the Naive Portfolio | p. 419 |
| Empirical Results | p. 420 |
| Why Does the Naive Stock Selection Portfolio Make Country Noise Bets? | p. 422 |
| Key Points | p. 423 |
| Questions | p. 424 |
| Modeling Market Impact Costs | p. 425 |
| Market Impact Costs | p. 426 |
| Liquidity and Transaction Costs | p. 427 |
| Market Impact Measurements and Empirical Findings | p. 430 |
| Forecasting and Modeling Market Impact | p. 433 |
| Key Points | p. 439 |
| Questions | p. 440 |
| Equity Portfolio Selection in Practice | p. 441 |
| Portfolio Constraints Commonly Used in Practice | p. 442 |
| Benchmark Exposure and Tracking Error Minimization | p. 450 |
| Incorporating Transaction Costs | p. 454 |
| Incorporating Taxes | p. 460 |
| Multi-Account Optimization | p. 465 |
| Robust Parameter Estimation | p. 469 |
| Portfolio Resampling | p. 471 |
| Robust Portfolio Optimization | p. 474 |
| Key Points | p. 480 |
| Questions | p. 481 |
| Portfolio Construction and Extreme Risk | p. 483 |
| Measures of Extreme Loss | p. 484 |
| Constraining Shortfall | p. 485 |
| Performance | p. 485 |
| Imposing Benchmark Neutrality | p. 487 |
| Analysis | p. 489 |
| Key Points | p. 493 |
| Appendix: Constructing Out-of-Sample Shortfall Betas | p. 494 |
| Questions | p. 495 |
| Working with High-Frequency Data | p. 497 |
| What is High-Frequency Data? | p. 497 |
| How is High-Frequency Data Recorded? | p. 499 |
| Properties of High-Frequency Data | p. 500 |
| High-Frequency Data are Voluminous | p. 501 |
| High-Frequency Data are Subject to Bid-Ask Bource | p. 503 |
| High-Frequency Data; are Irregularly! Spaced in Time | p. 509 |
| Equity Correlations Decay at High Frequencies | p. 517 |
| Key Points | p. 519 |
| Questions | p. 520 |
| Statistical Arbitrage | p. 521 |
| Pairs Trading | p. 523 |
| General Models | p. 532 |
| Key Points | p. 534 |
| Questions | p. 534 |
| About the Website | p. 535 |
| Index | p. 537 |
| Table of Contents provided by Ingram. All Rights Reserved. |
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