Numeric Investment Company Harvard Case Solution & Analysis

Numeric as a firm:

Numeric is an equity management firm, which provides services of managing portfolios to other giant firms. It manages these portfolios using different models, which includes the use of the long-short position strategy, in which Numeric holds the long position portfolio with a combination of short position portfolio. It will buy the “Hot Stock” for long position and it will sell the short known as “Cold Stock” for short position. Furthermore, it will also utilize its capability by using the “Double Alpha” strategy. By using the long-short position, Numeric can also eliminate its risk exposure specifically for the stock.

Q      1-B

Difference between long-short products and long product:

Numeric can exploit the negative and positive information using the long-short strategies; which also provides the insights of markets. From these strategies, it can also provide differentiated products and economical products at lower cost to its customers using the stock index and stock-index future.

Numeric can only exploit the positive information using the long-product only. It can only reflect the benchmarks exposure of the specific sector; which will result for its own stock if there are no compelled purchases in the sector. This strategy is used for the pool diversification along with stock selection by offering the higher alpha for per dollar investment.

Q      2

Usefulness of Exhibit 3

Numeric's models assessed the stocks focused around "momentum" score and a "value" score, each one score being in the range of +3 to -3, best to worst. The firm will re-evaluate stocks on an intraday and overnight premise.

Q      3-A

Numeric's investment process work and PepsiCo example

Numeric investment process starts with making decisions to sell-short, buy, sell, and buy-to-cover. These are managed by using the electronic trading services, which are implemented by the firm’s traders. Numeric hired five managers to mange portfolios and three traders for trading purposes. Electronic trading was done using the QuantEx and Intinet7 services. The trading day started with managing the new stock position or adjusting the existing portfolio’s position. Trade was initiated with the previous market information and latest ranking provided using the models.

Numeric managed its stock using partitions; these partitions were based on the bottom-up-selection philosophy, and their selection was aligned with the risk exposure of each portfolio with its sector benchmark. By using these partitions, Numeric could rebalance its purchased stock which was highly ranked and short-sell for low-ranked stocks. Portfolio managers spent their time, by reviewing their earnings’ estimated information issued by the Wall Street analysts before opening of the market. The news and reviews were not always defined clearly as Numeric wanted to it to be.

For example, PepsiCo 1Q Net 27¢ a Share Vs 24¢. For Numeric this is not a clean number; to review it as clean number portfolio managers also looked into Bloomberg and First Call for the further detailed information about the clean number. The detailed information gathered from these services was received after 20 to 30 minutes from the prior information. Portfolio managers also assessed the significance of Numeric’s earnings using the information from announcement, and from the cash reports.

Numeric was short in PepsiCo with 165,100 shares, which were focused around the negative momentum score that made it sensitive with respect to surprise earnings proclamation. Analyst’s normal evaluations for earnings were 24 cents for every offer. PepsiCo affirmed profit of 27 cents per share and the momentum score raised from -0.49 to +1.35 and value score also grew from -0.13 to +.08. Numeric decided to cover 90,500 shares at a price of $34.43 and remaining 25000 shares would be covered after a week at a price of $35.64. Consequently, there was an increase in the prices of PepsiCo’s shares of about $36.2 in May, 1997.

Q      3-B

Two models based assumptions and sources of value added and weaknesses

Momentum Investing was focused around the conviction that security analyst had a tendency to under respond to surprising changes in corporate earnings as well as to speculators, by pegging stock costs to consensus estimates. Along these lines, if the firm could figure updates in analyst’s estimates regarding earnings; then it would have the capacity to forecast changes in stock prices. The method was to get in right on time and ride the stock, either up or down, until its profit amendments used up momentum.

Momentum Approaches
In light of past progressions in analyst’s assessments, the reason was that analysts clustered their prediction of organization’s earnings, and would reconsider their earnings estimates incrementally instead of big spring. These small modifications would then urge other analysts to redesign their assessments and the consensus evaluation would climb up or down typically over time. The unexpectedly high or low quarterly profits would let analysts to make modifications to their assessments inside the following few days and throughout the following few weeks.

Value Approaches
Stock prices were more impulsive ..............................

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