From Factor Ranking to the ABL Framework
affiliation not provided to SSRN
Fama and French (1992 & 1993) not only lend us insights into some fundamental arbitrage opportunities as alpha sources, but also inspire a factor-ranking process as a portfolio construction technique. This article takes the reader through the nature of this process; and suggests a thought process leading to the Augmented Black-Litterman (ABL) model (Cheung, 2009B) as a technique that endogenises the ranking process. Comparative advantages of the latter include: Proper and robust information processing; Flexibility in view submission; Efficient and robust allocation; Richness: allowing various styles of portfolio construction; and Suitability for strategy combination, factor mimicking, and stock-specific betting. Through explicitly seeking factor views and elegantly combining and converting them into a composite factor-mimicking stock portfolio, the ABL technique readily facilitates style rotation.
Number of Pages in PDF File: 16
Keywords: asset allocation, factor mimicking, Augmented Black-Litterman (ABL), Fama-French, factor ranking, factor risk model
JEL Classification: C10, C11, C61, G11working papers series
Date posted: January 7, 2010 ; Last revised: April 25, 2012
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