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Fat-Tailed Dragon Asset Management

Explore the stock selection strategies of Fat-Tailed Dragon Asset Management focusing on Return On Invested Capital (ROIC) trend and Price Momentum. This study covers the period 1982-1998, using annual rebalancing on March 31st. Findings show different approaches, including univariate and bivariate methods, with varying returns and volatilities. Combining attributes yields better outcomes. Patterns observed are linked to market movements.

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Fat-Tailed Dragon Asset Management

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  1. Fat-Tailed DragonAsset Management - Stock selection by scoring screens

  2. 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

  3. Return On Invested Capital:Average Return 4.28%, Volatility 20.48%

  4. Price Momentum:Average Return 8.88%, Volatility 23.68%

  5. 4 Approaches: • Univariate - Top / Bottom 50 only • Univariate - Double Score • Univariate - Quintile • Bivariate

  6. Univariate - Top/Bottom 50Assign 79 to PM, 21 to ROIC based on optimization result. Average return: 10.85%, Volatility: 24.45%

  7. 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%

  8. Univariate - QuintileBuy top 50, sell bottom 50.Average return: 10.66%, Volatility: 20.93%

  9. Bivariate -First sort: keep top/bottom 120. Second sort: keep top/top 50 and bottom/bottom 50.Average Return: 9.78%, Volatility: 22.65%

  10. Summary

  11. 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.

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