Optimized vs. Sort-Based Portfolios

45 Pages Posted: 14 Jan 2009 Last revised: 28 Dec 2009

Gerard Hoberg

University of Southern California - Marshall School of Business

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: December 10, 2009

Abstract

Factors and test portfolios can be formed by optimizing objective functions instead of by sorting. Optimizing is more parsimonious and flexible, and the portfolio returns can be easier to find. Our approach effectively marries some advantages of the Fama and MacBeth (1973) cross-sectional approach with those of the time-series approach in Black, Jensen, and Scholes (1971). Our paper shows that optimized portfolios can make a difference: they reverse the inference in Daniel and Titman (1997) and Davis, Fama, and French (2000).

Keywords: book-to-market, HML, characteristics, factors

JEL Classification: G1

Suggested Citation

Hoberg, Gerard and Welch, Ivo, Optimized vs. Sort-Based Portfolios (December 10, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1327004 or http://dx.doi.org/10.2139/ssrn.1327004

Gerard Hoberg

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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