We evaluate single and multi-factor signals in a market-neutral, long-short equity model. Backtesting top/bottom decile strategies on fundamental ratios identifies key profit drivers, yielding an optimized weighted vigintile approach.
- Universe & Ranking: Equities are cross-sectionally ranked and bucketed into quantiles (deciles and vigintiles) based on target financial ratios.
- Factors Evaluated:
- Value: Price-to-Earnings (P/E) Ratio
- Quality: Return on Investment (ROI)
- Safety: Debt-to-Market Capitalization
- Execution: Market-neutral, long-short portfolio construction.
- Rebalancing: Monthly schedule to capture factor momentum and decay.
- Cost of Capital: Dynamic funding costs integrated using LIBOR/SOFR rates for net-return modeling.
Across the sample period, the Value factor (P/E Ratio) served as the primary driver of returns, consistently outperforming Quality and Safety metrics in isolation.
A composite signal targeting High Debt / Low P/E / Low ROI was constructed to test overlapping factor exposures.
- Result: The composite expanded the pure return ceiling to 11.30%, but introduced significantly higher portfolio volatility.
A Weighted Vigintile experiment was conducted to test the hypothesis that rank-based signals decay rapidly outside the absolute tails of the distribution.
- Result: The quantile ranking system is highly sensitive to concentration. By allocating capital exclusively to the top 5% of the P/E Ratio distribution, the strategy achieved its optimal performance:
- Peak Pure Return: 12.15%
- Sharpe Ratio: 1.41
The historical fundamental and pricing data used to backtest these strategies was sourced from Zacks Fundamentals B. To comply with vendor licensing agreements, this proprietary dataset is excluded from the repository.