McGraw-Hill

P A R T T,HREE
Expanding Opportunities
Part 1 focused on security analysis in a complex market, and our
method of disentangling return-predictor relationships in order to
arrive at “pure” returns to numerous pricing attributes. Part 2 focused
on the importance of taking a broad, unified approach to
stock selection and on the proper implementation of analytical insights
in the portfolio construction process. The chapters in Part 3
describe the construction of portfolios that take advantage of short
selling and derivatives to expand investment opportunities and further
enhance performance.
One of the major benefits of an
investment approach that evaluates
a broad universe of stocks is that it allows the manager to tailor
portfolios to a wide variety of client needs. “Engineering
Portfolios: A Unified Approach,” in Part 2, discussed the construction
of core portfolios tied to chosen benchmarks. As that chapter
noted, it is also possible to engineer portfolios that are not tied to a
specific capitalization-weighted benchmark. As in “High-Definition
Style Rotation,” for example, an insight-weighted strategy can be
designed to take advantage of numerous precisely defined style attributes
by shifting security weights in accordance with model insights
as market and economic conditions evolve.
The ability to sell stocks short can benefit both security selection
and portfolio construction. To begin with, it expands the list of
implementable ideas from ’‘winning” securities to both “winning”