%0 Journal Article
%A Elkamhi, Redouane
%A Lee, Jacky S. H.
%A Salerno, Marco
%T Factor Investing Using Capital Market Assumptions
%D 2021
%R 10.3905/jpm.2021.1.291
%J The Journal of Portfolio Management
%P 119-143
%V 48
%N 2
%X Capital market assumptions (CMAs), which are long-term risk and return forecasts for asset classes, are important pillars of the investment industry. However, applying them reliably in portfolio construction has been (and still is) a challenge in the industry. This article demonstrates that, despite the difficulties, CMAs are useful for building an investment portfolio using a factor approach. Using a small set of macroeconomic factors, the authors detail a methodology for deriving a factor model from CMAs and then use it to show that (1) these factors price the expected returns from CMAs and (2) the meanâ€“variance factor allocations are substantially more stable than the meanâ€“variance asset portfolios. Furthermore, this article outlines a new approach to building an asset portfolio that respects a desired factor allocation. Overall, this article helps reduce the barrier to entry for factor-based portfolio construction by providing a recipe for building factor models and performing factor-based portfolio construction using publicly available CMAs.
%U https://jpm.pm-research.com/content/iijpormgmt/48/2/119.full.pdf