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Creating a Custom Style Box

Jun 17, 2013 Marc Odo

Did you know you can create your own customized style maps in StyleADVISOR?  It’s quite easy to do so, as long as you follow William Sharpe’s original rules for returns-based style analysis, namely:

1. The asset classes must be exhaustive, or representative of what the manager will invest in
2. The asset classes must be exclusive, or non-overlapping
3. The asset classes must have returns that “differ”, i.e. have low correlations

For the purposes of creating a style map there is a fourth rule, that it actually makes sense to represent the style components in X-Y space.  There are certainly cases where Sharpe’s original three rules can be met and it doesn’t make sense to display the style analysis in X-Y space, but I’ll discuss that at the end.

In order to establish your own style map, here are the steps:

1. In StyleADVISOR, go to “File/Edit Data Files/Style Basis”
2. You’ll see a user interface listing all existing style basis.  Click the button called “Create New Style Basis” at the bottom.
3. This opens up a blueprint of what a standard, four-corner style map looks like.  By default the indices used are the Russell style indices.  In order to replace them simply double-click on each corner and select the index you want to use.  NOTE: this has to be done one at a time.
4. If you want to have more style points than the standard four, you can do so by hitting the “Add” button.  This places a new style point in the center of the map.  This point can then be relocated on the style map by dragging it anywhere on the grid.
5. Once the style map has been built out with the indices you want, save it by giving it a short file name in the “Name” field and a more exhaustive description in the “Description” field.

The style basis is now ready for use in StyleADVISOR.

There will be certain circumstances where the indices you choose for style analysis don’t make sense to plot in X-Y space.  For example, how would one plot ten sector indices on a style map?  For such situations it is recommended that you use StyleADVISOR’s “Asset Allocation” graph rather than the style map.

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