1-22. Factors

So, let’s revisit the steps we take to convert factor values into portfolio weights in a dollar neutral portfolio with a leverage ratio of one. To make the factor represent weights of a dollar neutral portfolio, de-mean the vector of values. Do this by subtracting the average from each value. To make the factor represent … Read more

At first glance, leverage looks awesome because if we take enough short positions, we could technically have enough cash to pay for all of our long positions. But does this mean that more leverage is always better? Unfortunately, the answer is no. If the stock price went down 10 percent, then our leveraged position would … Read more

Okay. Now, let’s get an idea for why we re-scale the weights so that the sum of the absolute values equals one. Our goal is for the portfolio’s leverage ratio to be equal to one. So, let’s first discuss the concept of leverage, and then we’ll learn about what the leverage ratio is. Leverage is … Read more

Any theoretical dollar neutral portfolio, we technically wouldn’t be using any cash to create the positions. In fact, sometimes, in academic papers, they call these portfolios, zero investment portfolios. In real life, there are transaction costs, margin costs for shorting positions, and differences in timing of trades. For the theoretical portfolio used to evaluate a … Read more

So, you just learned how to demean a factor so that the values add up to zero. But why do we do this, the short answer is that, later on, we’re going to test the factor as if each value associated with each stock also determined, the stock weight in a theoretical portfolio. We want … Read more

Now, let’s see how to convert this raw calculation into a standardized factor. We want the resulting weights to satisfy two conditions. First, we want the sum of the weights to add up to zero. Second, we want the absolute values of the weights to sum to one. To satisfy the first condition, we want … Read more

Let’s walk through an example of a factor to learn more about what a factor looks like. We’ll look at a momentum factor. So, let’s say we have a hypothesis that the one year return of a stock gives some signal about future returns over the next few days. To create a factor, we get … Read more

So, what are we doing here? What is this all about? As we heard about earlier, our work in this lesson builds upon previous lessons. While we’ll still develop trading strategies with large baskets of stocks and use optimization to find combinations of weights on stocks to seek the highest return for a given level … Read more

Hello and welcome. In this lesson, we will introduce you to the zipline pipeline. Zipline is an open-source algorithmic trading simulator developed by Quantopian. In this notebook, we will see how to create a pipeline with screens, factors, and filters on how to run them using a pipeline engine. So, let’s get started. So, why … Read more

Well, you made it. Made what? Made it to the, in my opinion, best part of the term. This is where it all comes to life. That’s part of the term but they’ve already learned so much good stuff. They’ve already created their own trading strategies and they’re already developing strong market intuition. They have … Read more