Quant Strategies for Stocks

The trading and investing industry is growing bigger and bigger.
Not only in the U.S., but in Europe as well. More and more
companies are focusing on education of traders/investors. It is
probably not a question if, but when, this will unfold in Sweden.
The prospects from the companies offering training and education
are packed with promises of greater wealth and market success,
but few of the methods have been verified empirically. Trainingpackages,
addressing individuals, emphasizing “money
management”, sometimes called asset allocation or position-sizing,
have very little scientific support. However, there is evidence of
the importance of how assets are allocated. Asset allocation is even
more important than stock selection or timing. Brinson, Singer, and
Beebower (1991) found asset allocation policy to be of primary
importance, accounting for 91.5% of the differential return of the
pension funds.
The reason for conducting this study was to provide evidence for
the importance of position-sizing, that is, how much of one’s assets
that is allocated at each trade, on trading performance. With the
comment of “market wizard” Bruce Kovner (see p. 8) in fresh
memory, the following hypotheses are made:
(1) Participants going bankrupt (losing all their capital) will take
larger position sizes than those being able to maintain some or
all of their initial capital.
(2) Participants losing money, but not all of it, will take larger
position sizes than those being able to gain money over the
long run.
Further, is it possible to teach traders/investors not to lose all their
money and to make profits from trading the markets?
(3) Participants receiving lectures in position-sizing, risk
management, and psychological biases (treatment group) will
take smaller position sizes on an average than participants not
receiving such lectures (control group).
(4) Participants receiving lectures in position-sizing, risk
management, and psychological biases (treatment group) will
lose all their money to a less extent than participants not
receiving such lectures (control group).
(5) Participants receiving lectures in position-sizing, risk
management, and psychological biases (treatment group) will as
12
a group gain higher profits than participants not receiving such
lectures (control group).
Possible factors contributing to the way the participants decide on
position size, other than receiving a lecture, are gender and prior
knowledge of trading/investing. In an experimental study, Powell
and Ansic (1997) investigated differences in financial decisionmaking.
The results showed that females are less risk seeking than
males. Further, Myagkov and Plott (1997) found risk seeking to
diminish with experience, contrary to Prospect theory. In what
way will these factors affect the results of this study?
(6) Women will lose all their money to a less extent than men.
(7) Women will as a group gain higher profits than men.
(8) Participants with prior experience of trading/investing will lose
all their money to a less extent than participants with less
experience.
(9) Participants with prior experience of trading/investing will as a
group gain higher profits than participants with less experience.

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