Comparing Stock Sorting Methodologies Strategic Partners 27 Feb

Comparing Stock Sorting Methodologies Strategic Partners 27 Feb 04

Current Sorting Methodologies l Independent l l Layered l l Sparse buckets Equal # of stocks/bucket Bi-variate l Simultaneous Sorting

Independent Sort Sequential Sort Score i = (wt 1)*(Factor 1_Rankingi) + (wt 2)*(Factor 2_Rankingi) Score i = (wt 1)*(Factor 1_Rankingi) + (wt 2)*{Factor 2_Rankingi | Factor 1_Rankingi} 5 5 5 4 4 4 3 2 FACTOR 1 3 3 2 5 4 3 2 1 FACTOR 2 1 1 1

Correlation (Factor 1_Ranking, Factor 2_Ranking) = 0 Independent Sort 3 2 1 3 Factor 1 Sequential Sort 2 2 1 1 1 Factor 2 2 Factor 2 3

Correlation (Factor 1_Ranking, Factor 2_Ranking) = 1 3 2 1 Sequential Sort 3 Factor 1 Independent Sort 2 1 1 2 Factor 2 3

Correlation (Factor 1_Ranking, Factor 2_Ranking) = -1 3 2 1 Independent Sort 3 Factor 1 3 Sequential Sort 2 1 1 2 Factor 2 3

Data l Universe l l l Variables l l Large Cap (>500 Million) Listed on NYSE or NASDAQ Fundamental Technical Debt Structure Correlation Impact

Comparing Methodologies l l Different Factors Weighting l l Equal Weight vs. Value Weight Time Horizon l Value vs. Growth Market

Factor Selection

Importance of Sequence 5 4 2 5 4 3 2 1 4 FACTOR 2 FACTOR 1 3 5 3 2 FACTOR 2 1 5 4 3 2 1 FACTOR 1 1

Impact of Sort Order

Screening Results PE/Leverage Layered Sort

Screening Results Leverage/PE Layered Sort

Future Research l l Use longer time horizon to incorporate different markets Compare Bi-variate to Layered and Independent Screening Use Deciles rather than Quintiles Migration tracking

Stock Sorting with Migration Tracking adjusted Score = Score + Migration adjustment 8 8 8 7 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 1 1 1 T-5 T-4 T-3 T-2 T-1 T