Factor Investing and Asset Allocation: A Business Cycle Perspective

Abstract

This monograph draws heavily on the vast body of knowledge that has been built by financial economists over the last 50 years. Its goal is to show how to solve real‐life portfolio allocation problems. We have found that using a broad range of models works best. Also, we prefer simple over complex models. We believe that simplicity and modularity lend substantial robustness to investment analysis. Importantly, the framework presented provides several of the “missing links” in asset allocation—for example, the links between asset classes and risk factors, between macroeconomic views and expected returns, and ultimately between quantitative and fundamental investing.

Keywords: factors, factor investing, business cycle, asset allocation, CFA, CFA Institute, CFA Institute Research Foundation

JEL Classification: G10, G11, G15