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
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: Suggested Citation