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Comparing Stock Sorting Methodologies

Comparing Stock Sorting Methodologies. Strategic Partners 27 Feb 04. Current Sorting Methodologies. Independent Sparse buckets Layered Equal # of stocks/bucket Bi-variate Simultaneous Sorting. Independent Sort. Sequential Sort. 5. 5. 5. FACTOR 2. FACTOR 1. FACTOR 1. 4. 4. 4. 5.

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Comparing Stock Sorting Methodologies

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  1. Comparing Stock Sorting Methodologies Strategic Partners 27 Feb 04

  2. Current Sorting Methodologies • Independent • Sparse buckets • Layered • Equal # of stocks/bucket • Bi-variate • Simultaneous Sorting

  3. Independent Sort Sequential Sort 5 5 5 FACTOR 2 FACTOR 1 FACTOR 1 4 4 4 5 4 3 3 3 3 2 2 2 2 1 1 1 1 Score i = (wt1)*(Factor1_Rankingi) + (wt2)*(Factor2_Rankingi) Score i = (wt1)*(Factor1_Rankingi) + (wt2)*{Factor2_Rankingi | Factor1_Rankingi} FACTOR 2

  4. 3 2 1 Independent Sort Sequential Sort 3 3 3 3 2 2 2 2 1 1 1 1 1 2 3 Correlation (Factor1_Ranking, Factor2_Ranking) = 0 Factor 1 Factor 1 Factor 2 Factor 2

  5. 3 2 1 Independent Sort Sequential Sort 3 2 1 1 2 3 Correlation (Factor1_Ranking, Factor2_Ranking) = 1 Factor 1 Factor 2

  6. 3 2 1 Independent Sort Sequential Sort 3 3 2 2 1 1 1 1 2 2 3 3 Correlation (Factor1_Ranking, Factor2_Ranking) = -1 Factor 1 Factor 1 Factor 2 Factor 2

  7. Data • Universe • Large Cap (>500 Million) • Listed on NYSE or NASDAQ • Variables • Fundamental • Technical • Debt Structure • Correlation Impact

  8. Comparing Methodologies • Different Factors • Weighting • Equal Weight vs. Value Weight • Time Horizon • Value vs. Growth Market

  9. Factor Selection

  10. 5 5 FACTOR 2 FACTOR 1 4 4 5 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 Importance of Sequence FACTOR 2 FACTOR 1

  11. Impact of Sort Order

  12. Screening Results PE/Leverage Layered Sort

  13. Screening Results Leverage/PE Layered Sort

  14. Future Research • Use longer time horizon to incorporate different markets • Compare Bi-variate to Layered and Independent Screening • Use Deciles rather than Quintiles • Migration tracking

  15. 8 8 8 8 8 8 7 7 7 7 7 7 6 6 6 6 6 6 5 5 5 5 5 5 4 4 4 4 4 4 3 3 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 Stock Sorting with Migration Tracking adjusted Score = Score + Migration adjustment T-5 T-4 T-3 T-2 T-1 T

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