The Current State of Quantitative Equity Investing

Ying L. Becker Marc R. Reinganum

Quantitative equity management is concerned with rigorous, disciplined approaches to help investors structure optimal portfolios to achieve the outcomes they seek. At the root of disciplined, modern investment processes are two things: risk and return. The notion of total return is obvious—price appreciation plus any dividend payments. Risk may not be so straightforward. In most quantitative approaches, risk is viewed as more akin to a roulette wheel; that is, the possible outcomes are well specified and the likelihood of each outcome is known, but in advance, an investor does not know which outcome will be realized.

In this piece, we curate the history of quantitative equity investing, which traces its origins to the development of portfolio theory and the capital asset pricing model (CAPM). In equities, some of the first quantitative approaches were aimed at confirming the theoretical predictions of the CAPM. In particular, the expected return of a risky asset depends only on the risk of that asset as measured by its beta, a covariance measure of risk. In this paradigm, all investors hold the same risky portfolio, the market portfolio of risky assets that maximizes the Sharpe ratio. At the same time, stock prices are viewed to be informationally efficient and reflecting all available information.

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