Table 4 presents the results when applying the
factor portfolio approach.
Concentration risk arises when any of the assumptions underlying the asymptotic single common
factor portfolio model are violated.
After adjusting the
factor portfolio weights for liquidity, the superiority of low-priced stocks completely evaporated.
By gaining exposure to these six strategies, CS claims that the FX
Factor Portfolio can outperform more narrowly-based foreign exchange indices.
CAPM tests and alternative
factor portfolio composition: Getting the alphas right.
However, given the absence of such a strong link between the macroeconomic forecast changes and the
factor portfolio returns, the direction of causality should not impact the inferences.
where [r.sub.d] is the holding period return on day d, [r.sub.fd] is the return of the risk-free portfolio on day d, [[gamma].sub.k] is the day d return of the Ath
factor portfolio, and ft- is an estimate of the stock's loading on the Ath factor.
In the Fama-French factor-based asset pricing model, expected stock returns are contingent on the stock's sensitivity to three priced factors: the excess return of the market portfolio over the risk-free rate, the return of the size (SMB)
factor portfolio, and the return of the book-to-market (HML)
factor portfolio.
Invesco found that while an asset owner often commences their factor journey with a single strategy, as time goes by they tend to implement additional factor strategies and consider how to extend their
factor portfolio from equities to fixed income and multi-asset.
For a given point in time, if the EREIT return is perfectly correlated with one of the
factor portfolio returns or is a linear combination of the
factor portfolio returns, the conditional variance of the idiosyncratic term vanishes and the value of [R.sub.t.sup.2](K) attains unity.
"We came to the conclusion we had to come up with something that was significantly different from our firm's typical fundamental, high-conviction portfolio," said Allianz Global Investors' Michael Heldmann, head of Best Styles North America, its systematic
factor portfolio investing team.
* Gerard Hoberg, University of Maryland, and Ivo Welch, Brown University and NBER, "Better
Factor Portfolios and Pricing Book-to-Market Characteristics with the Fama-French Factor Model"