RT Journal Article
SR Electronic
T1 Clash of the Titans: <em>Factor Portfolios versus Alternative Weighting Schemes</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 38
OP 49
DO 10.3905/jpm.2019.45.3.038
VO 45
IS 3
A1 Jennifer Bender
A1 Thomas Blackburn
A1 Xiaole Sun
YR 2019
UL https://pm-research.com/content/45/3/38.abstract
AB 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.TOPICS: Portfolio construction, in markets, factor-based models