If the decile analysis shows that individual variables such as FCFY or trailing ROE alone produce strong performance differentiation (i.e., the first decile significantly outperforms the last), the next logical step is to combine multiple variables into a multi-factor model.
-
- Variables should be combined with an equal degree of importance (DOI) at first to prevent over-weighting any single factor.
- Perform another decile analysis on the combined factors, evaluating the ranking system's effectiveness and ensuring that the combined ranking system continues to deliver strong and proportional performance differentiation between deciles.
A successful combined decile analysis indicates that you have developed a robust ranking system, which can now be integrated into an active strategy.
Initial Selection of Variables
Decile-Based Return Analysis for Predictive Power
Stock Selection Based on Ranking System
Incorporation of Additional Buy-Sell Rules
Determining Buy-Sell Frequency
Rebalancing and Trim Frequency
Setting Trimming Boundaries
Determining the Number of Stocks in the Strategy
Back-Testing the Strategy
Turnover Management: Reducing Excessive Trading
Frequency Adjustment for Portfolio Trimming and Buy-Sell List
Portfolio Size Adjustment
Stress Testing for Robustness
