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Foreword | |
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Preface | |
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Notations and Abbreviations | |
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An Overview of QEPM | |
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The Power of QEPM | |
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Introduction | |
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The Advantages of QEPM | |
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Quantitative and Qualitative Approaches to Similar Investment Situations | |
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A Tour of the Book | |
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Conclusion | |
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The Fundamentals of QEPM | |
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Introduction | |
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QEPM [alpha] | |
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Benchmark [alpha] | |
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CAPM [alpha] | |
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Multifactor [alpha] | |
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A Variety of [alpha]'s | |
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Ex-Ante and Ex-Post [alpha] | |
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Ex-Ante and Ex-Post Information Ratio | |
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The Seven Tenets of QEPM | |
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Tenets 1 and 2: Market Efficiency and QEPM | |
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The Efficient-Market Hypothesis | |
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Anomalies | |
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Market Efficiency and QEPM | |
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Tenets 3 and 4: The Fundamental Law, The Information Criterion, and QEPM | |
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The Truth about the Fundamental Law | |
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The Information Criterion | |
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Information Loss | |
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Tenets 5, 6, and 7: Statistical Issues in QEPM | |
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Data Mining | |
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Parameter Stability | |
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Parameter Uncertainty | |
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Conclusion | |
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Basic QEPM Models | |
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Introduction | |
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Basic QEPM Models and Portfolio Construction Procedures | |
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Factor Choice | |
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The Data Decision | |
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Factor Exposure | |
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Factor Premium | |
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Expected Return | |
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Risk | |
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Forecasting | |
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Security Weighting | |
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The Equivalence of the Basic Models | |
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The Screening and Ranking of Stocks with the Z-Score | |
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Hybrids of the Models and the Information Criterion | |
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The Setup | |
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The Z-Score Model | |
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A Hybrid of the Z-Score Model and a Fundamental Factor Model | |
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Information Loss | |
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Choosing the Right Model | |
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Consistency with Economic Theory | |
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Ability to Combine Different Types of Factors | |
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Ease of Implementation | |
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Data Requirement | |
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Intuitive Appeal | |
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Conclusion | |
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Portfolio Construction and Maintenance | |
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Factors and Factor Choice | |
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Introduction | |
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Fundamental Factors | |
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Valuation Factors | |
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Solvency Factors | |
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Operating Efficiency Factors | |
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Operating Profitability Factors | |
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Financial Risk Factors | |
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Liquidity Factors | |
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Technical Factors | |
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Economic Factors | |
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Alternative Factors | |
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Analyst Factors | |
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Corporate Finance Policy Factors | |
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Social Responsibility Factors | |
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Factor Choice | |
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Univariate Regression Tests | |
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Multiple Regression Tests | |
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Unidimensional Zero-Investment Portfolio | |
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Multidimensional Zero-Investment Portfolio | |
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Techniques to Reduce the Number of Factors | |
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Conclusion | |
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Factor Definition Tables | |
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Stock Screening and Ranking | |
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Introduction | |
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Sequential Stock Screening | |
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Sequential Screens Based on Famous Strategies | |
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Simultaneous Screening and the Aggregate Z-Score | |
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The Z-Score | |
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The Aggregate Z-Score | |
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Ad Hoc Aggregate Z-Score | |
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Optimal Aggregate Z-Score | |
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Factor Groups and the Aggregate Z-Score | |
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The Aggregate Z-Score and Expected Return | |
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Expected Return Implied by the Z-Score | |
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The Forecasting Rule of Thumb | |
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The Equivalence between the Z-Score Model and the Fundamental Factor Model | |
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The Aggregate Z-Score and the Multifactor [alpha] | |
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Conclusion | |
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A List of Stock Screens Based on Well-Known Strategies | |
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On Outliers | |
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Fundamental Factor Models | |
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Introduction | |
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Preliminary Work | |
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Choosing Factors | |
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Treatment of the Risk-Free Rate | |
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Choosing the Time Interval and Time Period | |
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Choosing the Universe of Stocks | |
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Benchmark and [alpha] | |
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Factor Exposure | |
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The Factor Premium | |
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OLS Estimator of the Factor Premium | |
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Robustness Check | |
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Outliers and MAD Estimator of Factor Premium | |
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Heteroscedasticity and GLS Estimator of the Factor Premium | |
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Decomposition of Risk | |
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Conclusion | |
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Economic Factor Models | |
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Introduction | |
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Preliminary Work | |
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Benchmark and [alpha] | |
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The Factor Premium | |
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Factor Premium for Economic/Behavioral/Market Factors | |
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Factor Premium for Fundamental/Technical/Analyst Factors | |
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Factor Premium for Statistical Factors | |
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Factor Exposure | |
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The Standard Approach | |
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When the Standard Approach Fails | |
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Decomposition of Risk | |
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The Standard Approach | |
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When the Standard Approach Fails | |
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Conclusion | |
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Forecasting Factor Premiums and Exposures | |
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Introduction | |
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When Is Forecasting Necessary? | |
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Combining External Forecasts | |
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Model-Based Forecast | |
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Econometric Forecast | |
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Parameter Uncertainty | |
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Forecasting the Stock Return | |
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Conclusion | |
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Portfolio Weights | |
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Introduction | |
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Ad Hoc Methods | |
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Standard Mean-Variance Optimization | |
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No Constraints | |
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Short-Sale and Diversification Constraints | |
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Sector or Industry Constraints | |
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Trading-Volume Constraint | |
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Risk-Adjusted Return | |
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Benchmark | |
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Ad Hoc Methods Again | |
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Stratification | |
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Factor-Exposure Targeting | |
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Tracking-Error Minimization | |
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Direct Computation | |
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Tracking by Factor Exposure | |
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Ghost Benchmark Tracking | |
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Risk-Adjusted Tracking Error | |
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Conclusion | |
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Quadratic Programming | |
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Quadratic Programming with Equality Constraints | |
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A Numerical Example | |
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Quadratic Programming with Inequality Constraints | |
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A Numerical Example | |
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Rebalancing and Transactions Costs | |
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Introduction | |
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The Rebalancing Decision | |
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Rebalancing and Model Periodicity | |
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Change in [alpha] and Other Parameters | |
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Understanding Transactions Costs | |
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Modeling Transactions Costs | |
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Portfolio Construction with Transactions Costs | |
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The Optimal Portfolio with Transactions Costs | |
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The Tracking Portfolio with Transactions Costs | |
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Dealing with Cash Flows | |
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Reducing Transactions Cost Using Futures and ETFs | |
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Rebalancing toward Optimal Target Weights | |
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Conclusion | |
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Approximate Solution to the Optimal Portfolio Problem | |
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Tax Management | |
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Introduction | |
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Dividends, Capital Gains, and Capital Losses | |
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Principles of Tax Management | |
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Dividend Management | |
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Tax-Lot Management | |
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Tax-Lot Mathematics | |
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Capital Gain and Loss Management | |
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Loss Harvesting | |
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Loss Harvesting and Reoptimizing | |
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Loss Harvesting and Characteristic Matching | |
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Loss Harvesting with a Benchmark | |
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Gains from Tax Management | |
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Conclusion | |
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[alpha] Mojo | |
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Leverage | |
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Introduction | |
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Cash and Index Futures | |
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Theoretical Bounds of Leverage | |
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Leverage Mechanics | |
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Expected Return and Risk | |
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Stocks, Cash, and Index Futures | |
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Theoretical Limits to Leverage | |
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Leverage Mechanics | |
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Expected Returns and Risk | |
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Stocks, Cash, and Single-Stock Futures | |
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Theoretical Limits of Leverage | |
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Leverage Mechanics | |
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Expected Returns, Risk, and [alpha] Mojo | |
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Stocks, Cash, Individual Stocks, and Single-Stock and Basket Swaps | |
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Margining Individual Stocks | |
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Single-Stock and Basket Swaps | |
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Stocks, Cash, and Options | |
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Rebalancing | |
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Cash and Futures | |
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Stocks, Cash, and Futures | |
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Liquidity Buffering | |
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Leveraged Short | |
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Conclusion | |
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Fair Value Computations | |
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Derivation of Equations (12.19), (12.20), and (12.21) | |
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Tables of Futures Leverage Multipliers to Achieve Various Degrees of Leverage | |
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Market Neutral | |
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Introduction | |
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Market-Neutral Construction | |
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Security Selection | |
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Dollar Neutrality | |
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Beta Neutrality (a.k.a Risk-Factor Neutrality) | |
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Market-Neutral Portfolio Out of a Long-Only Portfolio | |
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Market Neutral's Mojo | |
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The Mechanics of Market Neutral | |
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Margin and Shorting | |
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The Margin and Market Neutral | |
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Sources of the Return | |
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The Benefits and Drawbacks of Market Neutral | |
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Rebalancing | |
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General Long-Short | |
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Long-Short | |
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Equitization | |
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Portable [alpha] | |
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Pair Trading | |
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Conclusion | |
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Bayesian [alpha] | |
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Introduction | |
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The Basics of Bayesian Theory | |
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Bayesian [alpha] Mojo | |
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Quantifying Qualitative Information | |
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Quantifying a Stock Screen | |
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Quantifying a Stock Ranking | |
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Quantifying the Buy and Sell Recommendations | |
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The Z-Score-Based Prior | |
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Scenario-Based Priors | |
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Posterior Computation | |
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The Information Criterion and Bayesian [alpha] | |
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Conclusion | |
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Performance Analysis | |
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Performance Measurement and Attribution | |
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Introduction | |
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Measuring Returns | |
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No Cash Flows | |
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Inflows and Outflows | |
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Measuring Returns for Market Neutral and Leveraged Portfolios | |
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Measuring Risk | |
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Standard Deviation | |
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Semi-Standard Deviation | |
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Tracking Error | |
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CAPM [Beta] | |
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Value-at-Risk | |
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Covariance and Correlation | |
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Risk-Adjusted Performance Measurement | |
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The Sharpe Ratio | |
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The Information Ratio | |
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The CAPM [alpha] and the Benchmark [alpha] | |
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The Multifactor [alpha] | |
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Practical Issues with Risk-Adjusted Measures | |
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Performance Attribution | |
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Classical Attribution | |
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Multifactor QEPM Attribution | |
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Conclusion | |
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Style Analysis | |
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Measures of Opportunity | |
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Short Returns | |
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Measuring Market Timing Ability | |
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Practical Application | |
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The Backtesting Process | |
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Introduction | |
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The Data and Software | |
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The Time Period | |
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The Investment Universe and the Benchmark | |
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U.S. Equity Benchmarks | |
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A Comparison of the Major U.S. Equity Benchmarks | |
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The Most Popular Benchmarks and Our Benchmarks | |
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The Factors | |
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The Stock-Return and Risk Models | |
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Parameter Stability and the Rebalancing Frequency | |
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Variations on the Baseline Portfolio | |
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Transactions Costs | |
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Taxes | |
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Leverage | |
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Market Neutral | |
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Conclusion | |
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Factor Formulas | |
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The Portfolios' Performance | |
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Introduction | |
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The Performance of the Baseline Portfolios | |
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The Fundamental Factor Model Performance | |
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The Aggregate Z-Score Model Performance | |
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The Economic Factor Model Performance | |
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Performance Reports for Distribution | |
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Performance Attribution for the Economic Factor Baseline Model | |
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The Transactions Cost-Managed Portfolio Performance | |
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The Tax-Managed Portfolio Performance | |
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The Leveraged Portfolio Performance | |
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The Market-Neutral Portfolio Performance | |
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Conclusion | |
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Contents of the CD | |
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Glossary | |
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Bibliography | |
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Index | |