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High-Definition Style Rotation 281 The high-definition strategy’s 5.45 percentage point return in excess of the market can be broken down into two components. One component reflects success in rotating across broad styles of stock and can be proxied by the 2.67 percentage point excess return of the index-based style rotation strategy. But rotation across broad styles accounts for slightly less than half of the high-definition strategy’s outperformance. The strategy adds another 2.78 percentage points on top of the index-based rotational strategy’s return. Some might attribute this last degree of outperformance to stock selection, on the grounds that such return increments represent a manager’s ability to select outperforming within stocks a particular style category. But the style rotation strategy makes no attempt at stock selection per se. What it does do (and over this period, at least, successfully) is to recognize the subtle distinctions of style that can add value. Exploiting the nuances within broad sty definitions adds value relative to a strategy of rotating across traditional style indexes over time. ENDNOTES The authors thank Judith Kimball for her editorial assistance. 1. The large-cap growth stock index, the Russell 1000 Growth, and the large-cap value index, the Russell 1000 Value, roughly divide the market capitalization of the Russell 1000, the index representing the largest 1000 stocks in the Russell universe of 3000 stocks. The smallcap index consists of all stocks in the Russell 2000-the 2000 smallest stocks in the Russell 3000. 2. Data prior to January 1987 are based on a universe of 1500 securities. For a discussion of the methodology, see Jacobs and Levy (198%). 3. The reductions in standard deviation also suggest that use the of multivariate regression has not introduced serious multicollinearity problems [see Kmenta (1971), pp. 380-3911. 4. For an interpretation of why some value measures are procyclical and others countercyclical, see Jacobs and Levy (1988b). 5. Allocations are based on actual portfolio returns since January 1990 and on simulated returns prior to that date. 6. The Shrpe ratio is defined as the portfolio‘s return less the risk-free return, divided by the portfolio’s standard deviation.
282 Managing Portfolios REFERENCES Brinson, G. P., B. D. Singer, and G. L. Beebower. 1991. “Determinants of portfolio performance II: An update.” Finunciul Analysfs Journal47 (3): 40-48. Jacobs, B. I. and K. N. Levy. 1988~. ”Disentangling equity return regularities: New insights and investment opportunities.” Financial Analysts Journal 44 (3): 18-44. -and- .1988b. “On the value of ’value.”’ Finuncial Anulysfs Journal 44 (4): 47-62. -and- .1989a.”Forecasting the size effect.” FinuncialAnalysfsJouma145 (3): 38-54. -and- .1989b. “The complexity of the stock market.” Journal OfPorffOlio Management 16 (1): 19-27. Kmenta, J. 1971. Elements ofEconomefrics. New York Macmillan. Sharpe, W. F. 1988. ”Determining a fund’s effective asset mix.’’ Investment Manugement Reuim, November/December. -. 1992. “Asset allocation: Management style and performance measurement.” Journal ofportfolio Management 18 (2): 7-19.
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EQUITY MANAGEMENT.
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EQUITY MANAGEMENT Quantitative Anal
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To Ilene, Lauren, Julie, Sam, and E
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CONTENTS Foreword by Harry M. Marko
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Contents ix Chapter 4 Calendar Anom
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Contents xi Implications 272 High-D
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FOREWORD by Harry M. Markowitz, Nob
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Foreword xv In practice, of course,
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Foreword xvii that an RDM would con
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xix
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INTRODUCTION Life on the Leading Ed
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Life on the Leading Edge 3 tion abo
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Life on the Leading Edge 5 clude th
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Life on the Edge Leading 7 stocks t
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Life on the Leading Edge 9 . Quanti
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Life on the Leading Edge 11 By the
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Life on the Leading Edge 13 ple, st
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Life on the Leading Edge 15 find be
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Life on the Leading Edge 17 equal t
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P A R T ONE Selecting Securities A
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Selectine Securities 21 stocks. Suc
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selecting secunties 23 unmoved by s
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CHAPTER 1 The Complexity of the Sto
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The Complexity of the Stock Market
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The Complexity of the St& Market 31
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The Complexity of the St& Market 37
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The of the Complexity Stock Market
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The Comdexitv of the Stock Market 4
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V 7
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Disentangling Equity Return Regular
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Disentangling Equity Rehun Regulari
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64 selecting securities aged 59 bas
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66 selecting Securities FIGURE 2-2
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68 selecting securities FIGURE 2-3
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70 selecting securities tic of 17.8
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72 selecting securities Some Implic
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74 selecting securities Table 2-2 d
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I l
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82 Seleaine Securities these time-s
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84 selecting securities of 9.7. The
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and deferring gains [as per Constan
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90 selecting securities 35. For exa
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94 selecting securities Ball, R. 19
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96 selecting securities Iowa, Ames.
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98 Seleaine securities James, W. an
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100 selecting securities Nicholson,
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104 selecting securities VALUE AND
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106 selecting securities Street Jou
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108 Selectine Securities This is no
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110 selecting securities plaining s
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112
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114 selecting securities transient
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116 selecting securities Na'ive Exp
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118 selecting securities (1988c)l.
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l20 selecting securities average of
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124 selecting securities We have de
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126 selecting securities movements
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l28 selecting securities 34. Pensio
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130 selecting securities Einhom, S.
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132 Selectine securities Poterba, J
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136 selecting securities The availa
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138 selecting securities subsequent
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142 Selectine securities FIGURE 4-2
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144 selecting securities others usi
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146 Selectine Securities FIGURE 4-3
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l48 SelectirlE securities a market
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150 . selecringsecurities There is
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152 selecting securities 1981 and 1
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154 seleding securities Chari,V., R
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156 Selectine securities McNichols,
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160 selecting securities that betwe
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162 selecting securities Handa, Kot
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164 selecting securities risk does
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166 selecting securities returns ac
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168 selecting securities ket return
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~ more 170 Selectine securities tiv
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h h h h W v ) 000000 m N m w r "80q
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~~~ ~ ~~ 174 selecting securities A
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176 selecting securities hibit feed
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178 Seledine securities multivariat
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-2 1982 1983 1984 1985 1986 1987 18
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182 selecting securities rate produ
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184 Seledine Securities 11. Further
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186 Seleaine securities REFERENCES
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188 selecting securities Fama, E. a
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190 selecting securities Miller, E.
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194 Selectine Securities modeling p
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196 selecting securities surement e
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Earnings Estimates, Predictor Speaf
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0 a I "F c2 . 2 0
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216 selecting securities The Return
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U) J U) C Q) U) C S r jo-0 eke I C
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?68% $1-0 I 220
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222 Seleaine Securitiff ings data f
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224 selecting securities 4. The dif
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Uptick rules can delay, or in some
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Nonsymmetrical distributions of sec
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Trading Costs Some other costs of l
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360 Expanding Opportunities N H = C
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hance good performance, but they ca
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382 Name Index Clarke, Roger G., 25
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384 Name Index Levis, M., 174,175,1
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386 Name Index Swanson, H., 183,188
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388 Subject Index Disentangling equ
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390 Subied Index MAE, 170,182 Marke
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392 Subiect Jndex Security analysis
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