Factor-Based Allocation: Is There a Superior Strategy?

49 Pages Posted: 24 Apr 2019

See all articles by Hubert Dichtl

Hubert Dichtl

dichtl research & consulting GmbH

Wolfgang Drobetz

Hamburg University

Viktoria-Sophie Wendt

University of Hamburg

Date Written: March 25, 2019


Factor-based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of an investment portfolio. Our study contributes to the literature by addressing the question whether there is a superior way of combining factors in a portfolio. We provide a comprehensive comparison of factor-based allocation strategies within a multiple testing framework. Factor-based allocation is profitable, even when applying the necessary multiple testing corrections. Investment portfolios can be efficiently diversified using factor-based allocation since we find robust economic performance over various market states. Ultimately, we provide guidance for investors on the best method to choose when constructing factor-based portfolios. A naive equal-weighted factor portfolio, albeit simple and costless, cannot be outperformed by more sophisticated allocation strategies.

Keywords: factor-based allocation, multiple testing

JEL Classification: G11, G23

Suggested Citation

Dichtl, Hubert and Drobetz, Wolfgang and Wendt, Viktoria-Sophie, Factor-Based Allocation: Is There a Superior Strategy? (March 25, 2019). Available at SSRN: https://ssrn.com/abstract=3359851 or http://dx.doi.org/10.2139/ssrn.3359851

Hubert Dichtl

dichtl research & consulting GmbH ( email )

Am Bahnhof 7
65812 Bad Soden am Taunus

HOME PAGE: http://www.dichtl-rc.de

Wolfgang Drobetz

Hamburg University ( email )

Moorweidenstrasse 18
Hamburg, 20148

Viktoria-Sophie Wendt (Contact Author)

University of Hamburg ( email )

Moorweidenstr. 18
Hamburg, 20148

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