The Power of Equity Factor Diversification

Abstract

This paper analyses the diversification properties of country equity factors across six equity factors and twenty developed markets from 1991 to 2015. The factors considered are the market excess return, size, value, momentum, low beta and quality. I find substantial diversification benefits along the country dimension as well as the factor dimension. In a portfolio setting, country diversification significantly reduces the volatility compared to single country investing for each of the six equity factors. Factor diversification works in each of the twenty markets by means of reducing the portfolio volatility.

Keywords: equity factors, factor diversification, international diversification, factor investing

JEL Classification: G11, G12, G15, C38