Question

Put the Cross-Sectional investments algorithm steps in the correct order.

(i) Buy the winners and sell the losers.

(ii) Rank assets based on their performance in the recent K periods.

(iii) Set the look-back period, K.

(iv) Calculate the K-period return for each asset.

(v) Consider the universe of N assets.

Select one:

a.

(iv), (v), (ii), (i), (iii)

b.

(v), (iii), (iv), (ii), (i)

c.

(iii), (v), (iv), (ii), (i)

d.

(v), (iii), (ii), (iv), (i)

Answer 1

The correct order of the Cross-Sectional investments algorithm steps should be like this -

(v) Consider the universe of N assets.

↓

(iii) Set the look-back period, K.

↓

(iv) Calculate the K-period return for each asset.

↓

(ii) Rank assets based on their performance in the recent K periods.

↓

(i) Buy the winners and sell the losers.

Therefore correct answer is option b. (v), (iii), (iv), (ii), (i)

Cross-Sectional investments algorithm steps will first consider the asset base, and then analysis period, after that the performance of assets for that period, after that it will rank the assets based on their performance and at the last step it will make buy or sell decision based on its performance.