Abstract
The authors describe the background of factor investing in its smart beta form and discuss why factor investing has become a popular investing style. They also discuss a number of reasons for skepticism regarding ex ante expected factor returns.
TOPICS: Portfolio management/multi-asset allocation, factors, risk premia, style investing
Key Findings
• Factor investing is typically discussed using the language and machinery of efficient-markets models, yet investors are primarily expecting anomalous excess returns.
• There is reason to be skeptical of claims that factor investing is delivering gross investment returns similar to that of traditional active managers but with lower fees.
• For factors with risk-based explanations, even in the presence of significant factor premiums, the market portfolio is still likely to be the optimal portfolio for most investors.
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