How to Construct a Stock Selection Strategy: Multi-Factor Analysis

Lingjie Ma
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Lingjie Ma: University of Illinois at Chicago

Chapter Chapter 4 in Quantitative Investing, 2020, pp 111-179 from Springer

Abstract: Abstract In this chapter, we introduce stock selection strategies and demonstrate how to employ a multi-factor model to build alphas for such a strategy. How can we forecast stock returns? To answer this critical question, we first discuss market inefficiency and identify sources of return anomalies. We then show how to transform these fundamental sources into a multi-factor alpha model. Regarding related finance theory, we introduce the capital asset pricing model (CAPM). On the quantitative side, we present the ordinary least squares (OLS) method. We explore estimation, inference, and properties and conditions of OLS estimates. Regarding industry insights, we show, using the Russell 1000 security level data, how to construct a multi-factor alpha model for a large-cap core stock selection portfolio. For R programming, we introduce commonly used utility functions in quantitative investing.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-47202-3_4

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DOI: 10.1007/978-3-030-47202-3_4

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