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Factor Allocation and Asset Allocation

25 Pages Posted: 2 Oct 2017 Last revised: 13 Nov 2017

Gregg S. Fisher

Gerstein Fisher

Michael B. McDonald IV

Fairfield University - Charles F. Dolan School of Business

Date Written: October 2017

Abstract

We examine the time series asset pricing factor returns and their use in a portfolio that varies over time based on an investor’s remaining human capital. Using of data for a common set of four different risk factors for the period 1980 to 2013, we show that risk premiums to different factors are not constant over time, and that investors may improve their risk return trade-off by weighting or “tilting” their portfolios as they age. Our results suggest that those investors targeting higher returns should tilt towards the size and value factors, while investors favoring lower levels of risk, should tilt towards quality. Our results raise questions about the current industry approach to asset allocation and the driving forces behind the magnitude of risk premiums over time.

Keywords: Factor Pricing Model, Asset Pricing, Asset Allocation, Empirical Finance, Portfolio Management

JEL Classification: G11

Suggested Citation

Fisher, Gregg S. and McDonald, Michael B., Factor Allocation and Asset Allocation (October 2017). Available at SSRN: https://ssrn.com/abstract=3045907

Gregg Fisher

Gerstein Fisher ( email )

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HOME PAGE: http://www.gersteinfisher.com

Michael McDonald (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

N. Benson Road
Fairfield, CT 06824
United States

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