Assignment Task: Applied Portfolio Management - Assignment
Introduction and Background
Your investment company recently held a meeting to brainstorm new investment strategies, aiming to differentiate from industry norms. Concerns about leveraged companies` ability to generate sufficient cash flows post a recent rise in interest levels prompted the consideration of new investment factors. One emerging idea suggests systematically investing in companies with high levels of Interest Coverage Ratio (INTCOV), Cash flow to current liabilities Ratio (OCF_LCT), and Cash flow to debt Ratio (CASH_DEBT). As part of the quant team, you`re tasked to explore the profitability of this strategy.
Your Report Components:
Deliverables:
Statistical Analysis
Conduct a detailed statistical analysis of the predictive power of the three financial ratios and a synthetic average factor. Utilize the Information Coefficient Analysis to assess predictive power over time.
Backtesting
Create and backtest a long-short 130/30 strategy based on the synthetic factor. Test it on data from 2007 onwards with 2% roundtrip transaction costs.
Optimization
Find optimal parameters for the strategy to maximize performance, focusing on share over/underweighting and rebalancing frequency.
Addressing Concerns
Explore whether the strategy resembles well-known ones and assess its performance in different interest rate scenarios.
Machine Learning Approach
Build and assess a decision tree model incorporating the three new factors to predict future returns.
Data
Utilize provided data files for analysis and testing.
Timeline
The assignment`s content corresponds to different weeks of the course.
