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Clash of the Titans: Factor Portfolios versus Alternative Weighting Schemes

Jennifer Bender, Thomas Blackburn and Xiaole Sun
The Journal of Portfolio Management Quantitative Special Issue 2019, 45 (3) 38-49; DOI: https://doi.org/10.3905/jpm.2019.45.3.038
Jennifer Bender
is a senior managing director at State Street Global Advisors in Boston, MA
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Thomas Blackburn
is an assistant vice president at State Street Global Advisors in Boston, MA
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Xiaole Sun
is a vice president at State Street Global Advisors in Boston, MA
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Abstract

In this article, the authors (re) introduce mean–variance portfolio construction for factor portfolios. These models, first popular with quants in the 1990s, are being resurrected today in a different context for transparent factor portfolios. The authors then evaluate the merits of these mean–variance factor portfolios against alternative weighting schemes. They point out that alternative weighting schemes have arguably weak theoretical foundations, and their supporters rationalize them with a range of (very different) reasons, most of them dissatisfying in the view of the authors. They then show that alternative weighting schemes derive a large part of their outperformance from a handful of well-known factors. The authors argue that sensibly built factor portfolios deliver a similar or higher information ratio by explicitly harnessing the factors and doing so in an efficient risk- and transaction cost-aware way.

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The Journal of Portfolio Management: 45 (3)
The Journal of Portfolio Management
Vol. 45, Issue 3
Quantitative Special Issue 2019
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Clash of the Titans: Factor Portfolios versus Alternative Weighting Schemes
Jennifer Bender, Thomas Blackburn, Xiaole Sun
The Journal of Portfolio Management Feb 2019, 45 (3) 38-49; DOI: 10.3905/jpm.2019.45.3.038

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Clash of the Titans: Factor Portfolios versus Alternative Weighting Schemes
Jennifer Bender, Thomas Blackburn, Xiaole Sun
The Journal of Portfolio Management Feb 2019, 45 (3) 38-49; DOI: 10.3905/jpm.2019.45.3.038
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  • Article
    • Abstract
    • AN OLDIE BUT GOODIE: EXTENDING THE MEAN–VARIANCE FRAMEWORK TO FACTOR PORTFOLIOS
    • THE MEDLEY OF ALTERNATIVE WEIGHTING SCHEMES
    • AN EMPIRICAL COMPARISON
    • PAST STUDIES COMPARING ALTERNATIVE WEIGHTING SCHEMES
    • A SPECIAL NOTE ON RISK PARITY
    • SUMMARY
    • ACKNOWLEDGMENTS
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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