Senior Managing Director | Head of Total Portfolio Group at Healthcare of Ontario Pension Plan • Editorial Advisory Board | Journal of Portfolio Management & Journal of Financial Data Science
In our latest work with Marco Salerno, we show that using an asset mean-variance portfolio to obtain implied factor risk premia can result in stable portfolio weights for a factor portfolio when assets’ expected returns follow a factor structure that is subject to pricing errors. We propose a methodology to construct asset portfolios based on these factor portfolio weights, taking into account these pricing errors. We call these “factor-targeted” portfolios. They have good, reliable out-of-sample performance and have more practical weights than traditional mean-variance portfolios, which makes them more appealing in practice. This is a follow-up work to our research titled “Factor Investing Using Capital Market Assumptions,” which was published in the Journal of Portfolio Management. (https://lnkd.in/gAhArVZ8) This methodology is particularly relevant to large institutional investors trying to build a multi-asset portfolio while also trying to maintain a desired factor allocation based on either their long-term strategic views or shorter-term tactical views on factor risk premia. The research is now available in the Financial Analysts Journal and is accessible to members of the CFA Institute. #cfainstitute #factorinvesting #assetallocation
Senior Managing Director | Head of Total Portfolio Group at Healthcare of Ontario Pension Plan • Editorial Advisory Board | Journal of Portfolio Management & Journal of Financial Data Science
1yThanks to high interest, the final working version of the paper is now available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3908292