Dataloopr

In this article, we will tackle three common types of quant interview questions: extracting signal from investment analyst sentiment (Marshall Wace), explaining the role and profits of a market maker (IMC Trading), and solving a geometric expectation problem (WorldQuant). Each section provides detailed solutions, explanations of underlying concepts, and where appropriate, code and mathematical equations.

Suppose you are given a dataset of investment analyst sentiment, which might include analyst ratings (Buy, Hold, Sell), target price changes, or written reports. Your task is to extract a predictive "signal" from this data—an actionable piece of information that can anticipate future asset price movements.

import pandas as pd
import numpy as np
from sklearn.linear_model import LinearRegression
from scipy.stats import spearmanr

# Suppose df has columns: ['date', 'ticker', 'analyst', 'recommendation', 'future_return']
rec_map = {'Strong Buy': 2, 'Buy': 1, 'Hold': 0, 'Sell': -1, 'Strong Sell': -2}
df['rec_value'] = df['recommendation'].map(rec_map)

# Aggregate sentiment by ticker/date
agg = df.groupby(['date', 'ticker'])['rec_value'].mean().reset_index()
# Merge with forward return
agg = agg.merge(df[['date', 'ticker', 'future_return']].drop_duplicates(), on=['date', 'ticker'])

# Regression
X = agg[['rec_value']].values
y = agg['future_return'].values
reg = LinearRegression().fit(X, y)
print('Beta:', reg.coef_[0])

# Information coefficient
ic, _ = spearmanr(agg['rec_value'], agg['future_return'])
print('IC:', ic)

Key Concepts Explained

• Signal: A quantifiable variable derived from data that helps predict future asset returns.
• Information Coefficient (IC): A measure of predictive power, typically the Spearman or Pearson correlation between a signal and future returns. Higher IC values (closer to 1 or -1) indicate stronger predictive value.
• Backtesting: Simulating how a trading strategy would have performed in the past, using only information available at the time.

2. What Does a Market Maker Do and How Does It Make Money? (IMC Trading)

Definition of a Market Maker

A market maker is a firm or individual that quotes both a buy (bid) and a sell (ask) price for a financial instrument, hoping to make a profit on the bid-ask spread. Market makers provide liquidity to the market, allowing other participants to buy or sell assets quickly.