Factor Tilting for Expected Utility Maximization

Journal of Asset Management 11, 31-42 (April 2010)

25 Pages Posted: 1 Mar 2014 Last revised: 3 Mar 2014

Date Written: 2010

Abstract

We investigate a strategy of investing in diversified portfolios with a historically optimal factor profile, which we refer to as ‘factor tilting’. The proposed approach approximates the optimal strategy for risk-averse investors under the assumptions of Arbitrage Pricing Theory. Moving beyond traditional mean-variance optimization, it allows the incorporation of any characteristic of the return distribution for a large number of stocks. We propose extensions to incorporate transaction costs and test factor significance.

Keywords: active portfolio management, factor models, arbitrage pricing theory, parametric portfolio policies

JEL Classification: G12, G15

Suggested Citation

De Boer, Sanne, Factor Tilting for Expected Utility Maximization (2010). Journal of Asset Management 11, 31-42 (April 2010), Available at SSRN: https://ssrn.com/abstract=2402526

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

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