chapter  5
22 Pages

Enterprise Value/Sales Beats Price/Sales and PricelEamings in a Three-Way Model Race

ByMelissa R. Brown

The portfolio construction process has five basic components for the mathematical manager, including first developing a set of decision criteria. These criteria include an investment philosophy that defines allowable portfolio risk, finding an acceptable portfolio holding period, selecting an appropriate investment time horizon, and assessing expectations of portfolio return. Second, the target universe of acceptable stocks must be clearly defined and the dynamic nature of the selection universe must be described. Third, modeling and estimation procedures for model inputs must be developed with clearly defined expectations, confidence limits, and general limitations described per asset class. Fourth, a portfolio compilation algorithm or optimization method must be selected, and finally, the timing and choice of portfolio rebalancing and revision policies must be determined. Then it concludes with the presentation of actual composite quarterly performance results for a small-capitalization portfolio developed and managed in this style for an enhanced index assignment.