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DYNAMIC WEIGHTED SCORING MODEL

DYNAMIC WEIGHTED SCORING MODEL. Huimei Li Xin Li Xing Shen Ben Xie Xuan Zheng. 2/27/2006. Agenda. Model Summary Factor Analysis- a Test Subjective Scoring Dynamic Weighted Scoring Summary. Model Summary -- Basic. Objective: Explore various factors

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DYNAMIC WEIGHTED SCORING MODEL

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  1. DYNAMIC WEIGHTED SCORING MODEL Huimei Li Xin Li Xing Shen Ben Xie Xuan Zheng 2/27/2006

  2. Agenda • Model Summary • Factor Analysis- a Test • Subjective Scoring • Dynamic Weighted Scoring • Summary

  3. Model Summary -- Basic • Objective: • Explore various factors • Explore different scoring methods • generate consistent positive return with minimum market exposure • Universe: 500 largest companies in US • Rebalance period: 1 month • Model period: • In Sample 1995-2002 • Out of Sample 2003-2005 • Sorting fractile: Quintile • Scoring method • Subjective • Objective: dynamic weighted

  4. Model Summary – Factors Choice • Fundamental factors • FCF Yield • Dividend Yield • Price to Book Ratio • CFO Growth Rate • Expectational factors • Expected Earnings Yield (FY1) • Expected Earnings Yield (FY2) • Change in Consensus • Unexpected Earning • Momentum • Short Position % • Price Momentum

  5. Factor Analysis -- Summary • In US large cap equity market, the relative performance of various factors are: FCF Yield, FY1, FY2, Price Momentum 1.6 1.4 1.2 1 Average return (%) 0.8 0.6 0.4 0.2 0 FY1 Yield FY2 Yield Price/Book FCF Yield Short Position Capital Structure Dividend Yield Price Momentum Change in Consensus 1st Quintile 5th Quintile

  6. Factor Analysis -- FCF Yield Formula:CQ_CF_FREE_PS(0L45D)/CM_P(0) Results:Best-performing quintile: 1 Worst-performing quintile: 5 Exception:bubble year, fractile 1 underperformed other quintiles.

  7. Factor Analysis -- (FY1/FY2) Formula:IH_Meadian_FY1R(0)/CM_P(0), IH_Meadian_FY2R(0)/CM_P(0) Results: Best-performing quintile: 1 Worst-performing quintile: 5 Exception: 1998,1999, quintile 5 outperform 1

  8. Factor Analysis -- Price Momentum Formula:CM_RET(-1 -13) Results:Best-performing quintile: 1; Worst-performing quintile 5 ; Y2000 performance: Past stock price movement

  9. Subjective Scoring • Choose four best performing factors based on the outcome of individual factor analysis • Four factors combine fundamental, expectational, and momentum variables • Scores are assigned based on subjective judgment

  10. Subjective Scoring • Scoring screen provides a consistent result • Only incur a 9.4% loss in 1999 at in-sample test • Incur a 18.9% loss in 2003 at the out-of-sample test • This portfolio has a 13.7% annualized average return with an 15% standard deviation from 1995 to 2005 • The sharp ratio is 0.92 and the alpha is 19.78% • The outcome of the subjective scoring screen depends on the experience of the portfolio manager

  11. Subjective Scoring

  12. Subjective Scoring – High/Low Score Difference

  13. Dynamic Scoring -- Methodology • Dummy Variable • 3 month T Bills- Long term Treasury Bond • Lagged 30 days • Quintiles • FCF_1, FCF_5,FY2_1,FY2_5 • FY1_5, MM_1, MM_5 • Synthetic Assets • Run Optimizer • Run scoring with dynamic weighting

  14. Optimization

  15. Dynamic Scoring -- Result Value Weighted Result Bubble period and post-bubble period

  16. Summary

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