QUESTIONS

1. List and define the typical risks of an investment strategy.
2. What areas of finance use factor models?
3. Explain some of the major data issues encountered when working with financial data.
4. How are financial data organized?
5. 1. What are outliers?
   2. Why do outliers occur in financial data?

¹ Benjamin Graham and David Dodd, Security Analysis (New York: McGraw-Hill, 1962).

² Benjamin Graham, The Intelligent Investor (1949; reprint New York: Harper & Row, 1973).

³ Peter L. Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (New York: The Free Press, 1992).

⁴ Eugene F. Fama and Kenneth R. French, “Dividend Yields and Expected Stock Returns,” Journal of Financial Economics 22, no. 1 (1988): 3–25.

⁵ Jose Menchero and Vijay Poduri, “Custom Factor Attribution,” Financial Analysts Journal 62, no. 2 (2008): 81–92.

⁶ Thomson MarketQA, http://thomsonreuters.com/products_services/financial/financial_products/quantitative_analysis/quantitative_analytics.

⁷ Factset Research Systems, http://www.factset.com.

⁸ Compustat Xpressfeed, http://www.compustat.com.

⁹ See Nicholas Barberis and Richard Thaler, “A Survey of Behavioral Finance”, in Handbook of the Economics of Finance, edited by George M. Constantinides, M. Harris, and Rene M. Stulz (Amsterdam: Elsevier Science, 2003).

¹⁰ For a discussion of the sources of model misspecification and remedies, see Frank J. Fabozzi, Sergio Focardi, and Petter N. Kolm, Quantitative Equity Investing (Hoboken, NJ: John Wiley & Sons, 2010).

¹¹ Amir E. Khandani and Andrew W. Lo, “What Happened to the Quants in August 2007?” Journal of Investment Management 5, no. 4 (2007): 5–54.

¹² Joseph A. Cerniglia and Petter N. Kolm, “The Information Content of Order Imbalances: A Tick-by-Tick Analysis of the Equity Market in August 2007,” working paper, Courant Institute, New York University, 2009.

¹³ Brian J. Bushee and Jana Smith Raedy, “Factors Affecting the Implementability of Stock Market Trading Strategies,” working paper, University of Pennsylvania and University of North Carolina, 2006.

¹⁴ Many years ago one of the coauthors met Marcus C. Bogue, founder of Charter Oak Investment Systems. His firm created a Compustat Add-On Database to address the needs of the more quantitatively oriented, longer-term backtesting researchers by storing all data from current Compustat data before it gets overwritten (updated). Mr. Bogue works with most of the quantitative investment management industry. In the conversion with him the question of what distinguishes the most successful quantitative managers came up. Mr Bogue suggested that their familiarity with the data is the differentiator. Familiarity entails understanding quality, definitions, measurement, and sample characteristics of the data sets used in the investment process.

¹⁵ The ability of EBITDA/EV to forecast future returns is discussed in, for example, Patricia M. Dechow, S. P. Kothari, and Ross L. Watts, “The Relation Between Earnings and Cash Flows,” Journal of Accounting and Economics 25, no. 2 (1998): 133–168.

¹⁶ Stefan Nagel, “Accounting Information Free of Selection Bias: A New UK Database 1953–1999,” working paper, Stanford Graduate School of Business, 2001.

¹⁷ S. P. Kothari, Jowell S. Sabino, and Tzachi Zach, “Implications of Survival and Data Trimming for Tests of Market Efficiency,” Journal of Accounting and Economics 39, no. 1 (2005): 129–161.

¹⁸ For a representative study see, for example, Anthony Bercel, “Consensus Expectations and International Equity Returns,” Financial Analysts Journal 50, no. 4 (1994): 76–80.

¹⁹ Gustavo Grullon and Roni Michaely, “The Information Content of Share Repurchase Programs,” Journal of Finance 59, no. 2 (2004): 651–680.