Fundamentals of efficient factor investing

• Autores: Roger Clarke, Harindra de Silva, Steven Thorley
• Localización: Financial analysts journal, ISSN-e 0015-198X, Vol. 72, Nº. 6, 2016, págs. 9-26
• Idioma: inglés
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• Resumen

  • Combining long-only-constrained factor subportfolios is generally not a mean?variance-efficient way to capture expected factor returns. For example, a combination of four fully invested factor subportfolios?low beta, small size, value, and momentum?captures less than half (e.g., 40%) of the potential improvement over the market portfolio?s Sharpe ratio. In contrast, a long-only portfolio of individual securities, using the same risk model and return forecasts, captures most (e.g., 80%) of the potential improvement. We adapt traditional portfolio theory to more recently popularized factor-based investing and simulate optimal combinations of factor and security portfolios, using the largest 1,000 common stocks in the US equity market from 1968 to 2015.