The first and arguably most critical step in designing any data-driven investment strategy is the careful selection of relevant variables. These variables should capture key financial or operational metrics that can serve as potential signals for future stock performance.
In this context, let's assume an investor seeks to build a strategy based on two key variables they strongly believe will add value. These two variables serve as foundational elements for developing the strategy.
- Free Cash Flow Yield (FCFY): This metric provides a clear indication of how much cash flow a company generates relative to its market capitalization, serving as a direct measure of a company’s cash-generating efficiency.
- Trailing 12-Month Return on Equity (ROE): ROE measures a company’s ability to generate profit from its shareholders' equity, offering insight into the firm's profitability and capital management.
Decile-Based Return Analysis for Predictive Power
Combining Variables for Multi-Factor Analysis
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
