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How to build a factor portfolio: Does the allocation strategy matter?
Authors:Hubert Dichtl  Wolfgang Drobetz  Viktoria-Sophie Wendt
Institution:1. Faculty of Business, University of Hamburg, Hamburg, Germany;2. BlackRock Investment Management Limited, London, UK
Abstract:Factor-based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of investment portfolios. We examine whether there is a superior way of combining factors in a portfolio and provide a comparison of factor-based allocation strategies within a multiple testing framework. Factor-based allocation is profitable beyond exploiting genuine risk premia, even when applying multiple testing corrections. Investment portfolios can be efficiently diversified using factor-based allocation strategies, as demonstrated by robust economic performance over various economic scenarios. The naïve equally weighted factor portfolio, albeit simple and cost-efficient, cannot be outperformed by more sophisticated allocation strategies.
Keywords:factor-based allocation  multiple testing
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