This dissertation presents an overview about the active
portfolio management process focusing exclusively on the
first two stages: the information analysis science and
alpha building. The Value Added (VA) formula is analytic
developed showing that the Information Ratio (IR) is
directly proportional to the amount of value that a
strategy can add, and therefore, is an excellent ratio for
comparing different strategies. On an exclusive chapter the
IR is defined and studied demonstrating the advantages and
disadvantages of it s use.For an information to be analyzed
there must be a minimum economic/financial background that
justifies some return forecasting power.Otherwise, we could
be starting a data mining process that can fool information
analysis into believing that information exists when it
does not. So on, this dissertation presents a chapter
devoted to the study of the main financial ratios used
by the asset management industry, demonstrating, even
analytically, why some financial ratios can predict returns.
Next, using a software developed on Matlab framework
capturing data from an ACCESS database, all the financial
ratios studied in this dissertation are analyzed for
the period going from Jan/1998 to Dez/1999. The results
obtained show that the most frequently used financial
ratios, as the book-to-price ratio for example, are the
ones which better perform in terms of IR.Concluding, alpha
building, which is after all the basic input for portfolio
optimization, is explained. The chapter emphasizes
the alpha eating phenomenon explaining how it is
detonated and how it can be avoided.
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