Implications of Including High-Volatility Stock in a Quantitative Strategy

Hard Active Equity Investing Quantitative Strategies

ABC Capital is an investment firm that utilizes a quantitative strategy to manage its active equity portfolio. The firm employs a model that incorporates a variety of factors, including earnings revisions, price momentum, and volatility. Recently, ABC Capital's analysts presented three model outputs for the prospective performance of a set of stocks for the upcoming quarter based on their quantitative strategy.

In their analysis, the stocks were assigned scores based on their factors, and the top-rated stock demonstrated a high earnings revision score accompanied by strong upward price momentum. However, one stock, while possessing a high volatility score, also exhibited negative earnings revisions and low momentum. The portfolio manager at ABC Capital is concerned about whether to include this high-volatility stock in the portfolio due to its risk-return profile.

Which of the following statements best describes the implications of including the high-volatility stock with negative earnings revisions and low momentum in the portfolio, considering a quantitative strategy focused on risk-adjusted returns?

Including the high-volatility stock could enhance the portfolio's return profile, as high volatility stocks typically lead to higher returns.

The negative earnings revisions and low momentum indicate that the stock may detract from overall performance, suggesting it should be excluded from the portfolio.

Despite the risk indicated by volatility, the stock's inclusion may be justified if it has a strong correlation with market movements.

Hint

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