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122 selecting securities
FIGURE 3-1
Cumulative Return to DDM
l - - - l " - l ~ - ~ l - - ~ l
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
1982 1983 1984 1985 1986
regard to unintentional bets on other attributes. The pure strategy
places the same intensity of bet on DDM, but simultaneously neutralizes
bets on all other attributes. That is, the pure strategy maintains
equity characteristics, such as yield and industry exposures,
identical to those of the market.
The similarity in the payoff patterns of the two strategies is not
coincidental, because naWe returns equal pure returns plus noise
from unintentional side bets. Below, we focus on the pure returns.
The payoff to DDM appears unstable, which leads us to investigate
its predictability.
First, we considered a time-series analysis of the pure returns,
as we previously found such an approach to be useful.= However,
no significant patterns were found.
We th& examined correlations between the time series of pure
returns to the DDM and pure returns to the simple finanaal ratios. All
relationships were insignificantly different from zero, except for the