The Characteristics of Factor Investing

27 Pages Posted: 27 Jul 2018 Last revised: 27 Oct 2018

See all articles by David Blitz

David Blitz

Robeco Asset Management - Quantitative Strategies

Milan Vidojevic

VU University Amsterdam, Finance; Robeco Asset Management

Date Written: July 2, 2018

Abstract

We dissect the realized performance of factor-based equity portfolios using a characteristics-based multi-factor return model. We show that generic single-factor portfolios, which invest in stocks with high scores on one particular factor, are sub-optimal because they ignore the possibility that these stocks may be unattractive from the perspective of other factors. We also show that differences in performance between (i) integrated and mixed-sleeve multi-factor portfolios, (ii) small-cap and large-cap factor portfolios, and (iii) equal and value-weighted factor portfolios can be fully attributed to the differences in their factor characteristics. We conclude that efficient factor investing requires an understanding of how factor characteristics drive portfolio returns.

Keywords: factor investing, smart beta, factor premiums, size, value, momentum, quality, low-volatility

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Vidojevic, Milan, The Characteristics of Factor Investing (July 2, 2018). Available at SSRN: https://ssrn.com/abstract=3206798 or http://dx.doi.org/10.2139/ssrn.3206798

David Blitz

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Milan Vidojevic (Contact Author)

VU University Amsterdam, Finance ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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