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Factor Investing: Risk Premia vs. Diversification Benefits

43 Pages Posted: 8 Jun 2015 Last revised: 10 Sep 2017

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: August 1, 2017

Abstract

Factor investing emerged as the byproduct of factor models of asset pricing. It consists in holding assets with positive exposure to selected risk factors and, if possible, shorting those with negative exposure. This paper assesses the merits of factor investing on the U.S. stock market by using sector investing as the benchmark. Our results reveal a trade-off between the risk premia associated with factors and the diversification potential of sectors. When short selling is authorized, factor investing outperforms sector investing in all respects. For long-only portfolios, factor investing tends to be more profitable than the benchmark during expansion times and bull periods, but less attractive during recessions and bear periods, i.e., in periods where diversification is needed the most.

Keywords: Investment, asset allocation, factor, industry, sector, crisis

JEL Classification: G11, G01, C58, D92

Suggested Citation

Briere, Marie and Szafarz, Ariane, Factor Investing: Risk Premia vs. Diversification Benefits (August 1, 2017). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2615703 or http://dx.doi.org/10.2139/ssrn.2615703

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Libre de Bruxelles ( email )

Brussels
Belgium

Ariane Szafarz (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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