TY - JOUR T1 - On the Theory and Practice of Multifactor Portfolios JF - The Journal of Portfolio Management SP - 87 LP - 100 DO - 10.3905/jpm.2019.45.3.087 VL - 45 IS - 3 AU - Ashley Lester Y1 - 2019/02/28 UR - https://pm-research.com/content/45/3/87.abstract N2 - Investors interested in factor investing often seek exposure to several factors, not just one or two. The decision on how to implement multiple exposures may have a considerable effect on performance. In this article, the author considers the investment choice between a set of single-factor subportfolios and a single integrated portfolio. He defines factor exposures in a way that precisely relates relative factor exposures to the number and correlation of factors and predicts analytically consequent changes in risk and return. Theoretically, integrated portfolios increasingly outperform segregated portfolios when the number of factors is large and average correlation is low. He tests his predictions by generating over 1,000 matched pairs of historical portfolios using a wide range of factor definitions. This contrasts with the existing literature, which typically focuses on a handful of portfolios using particular versions of factors. The empirical results strongly support the theoretical predictions. In practical terms, an integrated portfolio of four orthogonal factors generates twice the factor exposure of the corresponding set of single-factor portfolios, twice the outperformance, and a 40% higher information ratio.TOPICS: Portfolio construction, style investing, factor-based models ER -