Diversification Across Characteristics
15 Pages Posted: 11 Mar 2010
Date Written: December 2009
I study long-short portfolio strategies formed on seven different stock characteristics representing various measures of past returns, value, and size. Each individual characteristic results in a profitable portfolio strategy, but these single-characteristic strategies are all dominated by a diversified strategy that places equal weight on each of the single-characteristic strategies. The benefits of diversifying across characteristic-based long-short strategies are substantial and can be attributed to the mostly low, and sometimes substantially negative, correlation between the returns on the single-characteristic strategies.
Keywords: Diversification, portfolio choice, stock characteristics
JEL Classification: G11, G12
Suggested Citation: Suggested Citation