45 Pages Posted: 14 Jan 2009 Last revised: 28 Dec 2009
Date Written: December 10, 2009
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: 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
By Andrew Ang