Quantitative Portfolio Management Project
Portfolio #4a:
The momentum investing strategy has been making a comeback in the investment sector over the last couple of years. However, momentum should not be added to the screen. Essentially, adding momentum to a portfolio is meant to create profitability by buying when prices are down and about to rise again. The portfolio on the screen does not require the consideration of momentum factors because the security selection seeks to capitalize on the continuance of current market trends. A bulk of the stocks therein are in the healthcare, tech, and utility industries. Given the current crisis in the market, investing in these securities implies investing in value. In the aftermath of the 2007-2009 financial crisis, an analysis of the performance of the value factor and momentum factor found that the factors had a significant negative correlation. This implies that considering momentum in any portfolio during times of crisis often impedes value growth in the portfolio. Secondly, the portfolio on the screen takes into account the investment horizon over which the stocks positions are held. Taking into account the investment horizon would ensure every stock in the portfolio accumulates value. Adding momentum introduces more uncertainty to the portfolio since it will be challenging to determine how long the momentum signal will remain effective before shifting from one momentum name to another.
Portfolio #4b:
Essentially, anomalies represent occurrences that undermine the core assumptions making up financial models hence contradicting the efficient market hypothesis. An example of an anomaly is the January effect. However, such an anomaly should not be added to the screen. They should be ignored because they all tend to be psychologically driven. Given the efficiency of stock markets, the effects of anomalies are negligible. The portfolio will hardly surfer the anomalies since they tend to disappear once the information gets to the public domain. The existence of market efficiency implies that the markets cannot be arbitraged.