Quality Factor Trading Strategy: Overview and Performance Analysis
The quality factor can be described as investing in stocks of safe, profitable, growing, and well-managed companies. This sounds pretty intuitive, but how has it performed?
For the backtest, we are going to use the quality factor calculated by French and Fama. The portfolio we used was formed by the 30% highest stocks ranked by profitability (Operating Profits — OP) at the end of each June using NYSE breakpoints.
We backtest the following trading rules:
OP for June of year t is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expenses divided by book equity for the last fiscal year end in t-1.
Below is the equity curve (Shown in the image)
You can find more info about this trading strategy here:
https://www.quantifiedstrategies.com/quality-factor-trading-strategy/