Write Mr Xi a short memo explaining what effect this weighting scheme will have on the model, and what it is implying.
Scenario:
Imagine you are working at a Quant-ish fund manager in their Data Analytics team. The team has been doing research on various stock selection indicators, and have found 5 indicators that appear to work quite well individually, and which are not too correlated with each other. Let’s call these Value, Size, Growth, Momentum and Quality.
The boss (Mr Xi) wants to combine them together to form a supermodel. However, he regards 2 of them as being more important than the others, and so he suggests the following mix:
Value 25%
Size 15%
Growth 10%
Momentum 15%
Quality 35%
He’s your boss, so you need to be respectful, but you also need to caution him against building unrealistic expectations into the model.
