Equity Valuation and Portfolio Management



Equity valuation and portfolio management are among the most important endeavors in finance. With the diffusion of affordable, high-speed computing technology and significant progress made in financial modeling and processes, the opportunity to excel at this competitive and complex activity is completely possible—but only if you have a firm understanding of certain tools and techniques.

Nobody knows this better than financial experts Frank Fabozzi and Harry Markowitz. And now, with Equity Valuation and Portfolio Management, they lead a team of contributing authors—many with extensive experience as equity portfolio managers and/or equity strategists—to discuss state-of-the-art methods for implementing equity valuation models, trading models, and portfolio management strategies.

Filled with in-depth insights and practical advice, this reliable resource covers the most essential aspects of this discipline, and allows you to test your knowledge of the issues explored with challenging questions at the end of each chapter. Topics addressed include:

  • Relatively new and improved approaches to equity selection, from economic value added (EVA) and cash flow return on investment (CFROI) to the franchise factor model (FFM)

  • The process of performing quantitative equity research and converting that research into implementable trading strategies

  • A framework for equity portfolio management that involves an outline of the fundamental relationships between stocks and investment approaches as well as their potential risks and rewards

  • The concept of tracking error, how it's computed, and the identification of some factors that affect tracking error for an equity portfolio

  • Several methods for the modeling of transaction costs, in particular, market impact costs

  • And much more

If you want to make the most informed decisions possible when dealing with equity valuation and portfolio management, then this is the book you need to read. Whether you're a seasoned professional or just entering this area of finance, Equity Valuation and Portfolio Management has what you need to succeed.

Frank J. Fabozzi, PhD, CFA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC in August 2011, he held various professorial positions in finance at the Yale School of Management from 1994 to 2011 and was a visiting professor of finance and accounting at the MIT Sloan School of Management from 1986 to 1992. He is also Editor of the Journal of Portfolio Management.

Harry M. Markowitz, PhD, is a consultant in the area of finance. In 1990, he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his groundbreaking work in portfolio theory. In 1989, he received the John von Neumann Theory Prize of the Institute for Operations Research and the Management Sciences for his work in portfolio theory and other applications of mathematics and computers to business practice.

Preface xiii

About the Editors xxiii

Contributing Authors xxv

CHAPTER 1: An Introduction to Quantitative Equity Investing 1
Paul Bukowski

CHAPTER 2: Equity Analysis Using Traditional and Value-Based Metrics 25
James L. Grant and Frank J. Fabozzi

CHAPTER 3: A Franchise Factor Approach to Modeling P/E Orbits 71
Stanley Kogelman and Martin L. Leibowitz

CHAPTER 4: Relative Valuation Methods for Equity Analysis 105
Glen A. Larsen Jr., Frank J. Fabozzi, and Chris Gowlland

CHAPTER 5: Valuation over the Cycle and the Distribution of Returns 125
Anders Ersbak Bang Nielsen and Peter C. Oppenheimer

CHAPTER 6: An Architecture for Equity Portfolio Management 147
Bruce I. Jacobs and Kenneth N. Levy

CHAPTER 7: Equity Analysis in a Complex Market 171
Bruce I. Jacobs and Kenneth N. Levy

CHAPTER 8: Survey Studies of the Use of Quantitative Equity Management 189
Frank J. Fabozzi, Sergio M. Focardi, and Caroline L. Jonas

CHAPTER 9: Implementable Quantitative Equity Research 231
Frank J. Fabozzi, Sergio M. Focardi, and K. C. Ma

CHAPTER 10: Tracking Error and Common Stock Portfolio Management 251
Raman Vardharaj, Frank J. Fabozzi, and Frank J. Jones

CHAPTER 11: Factor-Based Equity Portfolio Construction and Analysis 265
Petter N. Kolm, Joseph A. Cerniglia, and Frank J. Fabozzi

CHAPTER 12: Cross-Sectional Factor-Based Models and Trading Strategies 291
Joseph A. Cerniglia, Petter N. Kolm, and Frank J. Fabozzi

CHAPTER 13: Multifactor Equity Risk Models and Their Applications 339
Anthony Lazanas, António Baldaque da Silva, Arne D. Staal, and Cenk Ural

CHAPTER 14: Dynamic Factor Approaches to Equity Portfolio Management 373
Dorsey D. Farr

CHAPTER 15: A Factor Competition Approach to Stock Selection 397
Joseph Mezrich and Junbo Feng

CHAPTER 16: Avoiding Unintended Country Bets in Global Equity Portfolios 413
Michele Aghassi, Cliff Asness, Oktay Kurbanov, and Lars N. Nielsen

CHAPTER 17: Modeling Market Impact Costs 425
Petter N. Kolm and Frank J. Fabozzi

CHAPTER 18: Equity Portfolio Selection in Practice 441
Dessislava A. Pachamanova and Frank J. Fabozzi

CHAPTER 19: Portfolio Construction and Extreme Risk 483
Jennifer Bender, Jyh-Huei Lee, and Dan Stefek

CHAPTER 20: Working with High-Frequency Data 497
Irene Aldridge

CHAPTER 21: Statistical Arbitrage 521
Brian J. Jacobsen

About the Website 535

Index 537