RT Journal Article
SR Electronic
T1 Efficient Replication of Factor Returns: <em>Theory and Applications</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 39
OP 51
DO 10.3905/JPM.2010.36.2.039
VO 36
IS 2
A1 Dimitris Melas
A1 Raghu Suryanarayanan
A1 Stefano Cavaglia
YR 2010
UL https://pm-research.com/content/36/2/39.abstract
AB This article presents alternative methods for constructing factor-replicating portfolios, which include portfolios that have unit exposure to a target factor, zero exposure to other factors, and minimum portfolio risk. The authors provide empirical evidence that constrained factor portfolios, with a limited number of assets and relatively low turnover, tracked several Barra equity risk model pure factor returns reasonably well. They also illustrate how factor-mimicking portfolios could have been utilized in the past to enhance both passive and active investment strategies. Factor-mimicking portfolios can be used to hedge out the unintended factor exposures of conventional benchmarks, which are aimed at targeting a particular beta factor, and thus enable plan sponsors to better manage their optimal allocations to beta factor risks. Additionally, factor-mimicking portfolios can be utilized to hedge out the style exposures of active stock-picking strategies enabling active managers to capture pure alpha.TOPICS: Portfolio construction, analysis of individual factors/risk premia, factor-based models