Hi I am doing Section 13 - Multi Factor Model in Quantitative Portfolio Management course. Please can you explain in more details
Hi Esuabom,
1. how the buy and sell signals for each factor is combined?
We find the 'stocks to sell' and 'stocks to buy' as per the factor we designed.
For example, for the momentum factor, we bought the stocks that have the momentum factor greater than zero and shorted the stocks with the momentum factor less than zero.
Similarly, for the short-term reversal factor, we sold the stocks above the rolling mean and bought the stocks below the rolling mean.
2. how an individual factor performance is calculated?
You find the performance of individual factors by taking the mean of performance of stocks you have bought and stocks you have sold as per the factor designed.
For example, for the momentum factor, the performance of the momentum factor is the mean of performance of long positions and performance of short positions.
The same logic applied to the 'short-term' reversal factor.
3. Why use the same set of stocks for different factors? Why not have a different stock set per factor?
Using the same set of stocks for two factors lets you compare the performance of both factors for a given period. However, a different set of stocks can be used for different stocks.
The best approach would be to select the stocks according to the factor designed. For example, it would be better to select stocks with high volatility as your first step if you are designing a strategy with a mean reversion factor.
Hope this helps!!
Thank you.