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Strategic Allocation to Premiums in the Equity Market

David Blitz

Robeco Asset Management - Quantitative Strategies

October 25, 2011

Investors tend to focus on harvesting the risk premiums offered by traditional asset classes when making their strategic investment decisions. Some recent papers, however, argue that investors should also consider various other premiums for possible inclusion in the strategic asset allocation. Examples of such premiums that have been documented for the equity market are the size, value, momentum and low-volatility effects. In this paper we show that the theoretically optimal strategic allocation to these premiums is sizable, even when using highly conservative assumptions regarding their future expected magnitudes. We also discuss the pros and cons of two ways of obtaining the implied exposures in practice, specifically passively managed index funds versus actively managed quant funds.

Number of Pages in PDF File: 19

Keywords: strategic asset allocation, value, momentum, low-volatility, risk premiums, active management, passive management

JEL Classification: G11, G12

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Date posted: October 25, 2011  

Suggested Citation

Blitz, David, Strategic Allocation to Premiums in the Equity Market (October 25, 2011). Available at SSRN: http://ssrn.com/abstract=1949008 or http://dx.doi.org/10.2139/ssrn.1949008

Contact Information

David Blitz (Contact Author)
Robeco Asset Management - Quantitative Strategies ( email )
Coolsingel 120
Rotterdam, 3011 AG
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