Equity Valuation and Portfolio Management

CHAPTER 9

Implementable Quantitative Equity Research^*

Frank J. Fabozzi, Ph.D., CFA, CPA

Professor of FinanceEDHEC Business School

Sergio M. Focardi, Ph.D.

Professor of FinanceEDHEC Business School and Partner, The Intertek Group

K. C. Ma, Ph.D., CFA

KCM Asset Management, Inc. and Roland George Chair of Applied Investments Stetson University

Finance is by nature quantitative like economics but it is subject to a large level of risk. It is the measurement of risk and the implementation of decision-making processes based on risk that makes finance a quantitative science and not simply accounting. Equity investing is one of the most fundamental processes of finance. With the diffusion of affordable fast computers and with progress made in understanding financial processes, financial modeling has become a determinant of investment decision-making processes. Despite the growing diffusion of financial modeling, objections to its use are often raised.

In the second half of the 1990s, there was so much skepticism about quantitative equity investing that David Leinweber, a pioneer in applying advanced techniques borrowed from the world of physics to fund management, wrote an article entitled: “Is quantitative investment dead?”¹ In the article, Leinweber defended quantitative fund management and maintained that in an era of ever faster computers and ever larger databases, quantitative investment was here to stay. The skepticism toward quantitative fund management, provoked by the failure ...