The Low-Minus-High Portfolio and the Factor Zoo

43 Pages Posted: 7 May 2019 Last revised: 21 May 2019

See all articles by Daniel Andrei

Daniel Andrei

McGill University

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Mathieu Fournier

HEC Montreal

Date Written: March 31, 2019

Abstract

Anomalies in the cross section of returns should not be regarded as evidence against the CAPM. Regardless whether the CAPM is rejected for valid reasons or by mistake, a single long-short portfolio will always explain, together with the market, 100% of the cross-sectional variation in returns. Yet, this portfolio need not proxy for fundamental risk. We show theoretically how factors based on valuation ratios (e.g, book-to-market), or on investment rates, can be proxies for this portfolio. More generally, the empiricist can uncover an infinity of proxies for this portfolio, thus unleashing the factor zoo.

Keywords: CAPM, factor zoo, anomalies

JEL Classification: G12

Suggested Citation

Andrei, Daniel and Cujean, Julien and Fournier, Mathieu, The Low-Minus-High Portfolio and the Factor Zoo (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=3367898 or http://dx.doi.org/10.2139/ssrn.3367898

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Mathieu Fournier

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3 H3T 2A7
Canada

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