Asset Allocation vs Factor Allocation – Can We Build a Unified Method?

The Journal of Portfolio Management Multi-Asset Special Issue 2019, 45 (2) 9-22; DOI: https://doi.org/10.3905/jpm.2018.45.2.009

Posted: 1 Jun 2019

See all articles by Jennifer Bender

Jennifer Bender

State Street Global Advisors

Jerry Sun

Invesco Advisers, Inc.

Ric Thomas

affiliation not provided to SSRN

Date Written: February 1, 2019

Abstract

There is increasing interest in the idea of allocating across factors instead of traditional asset classes. Allocating across factors has the intuitive appeal of allocating across building blocks that are in theory purer sources of return. In practice, factor-based allocation is not easy, since factors are unobservable and must be specified. However, we believe there is merit in integrating insights from factors with traditional asset allocation. Information and views about factors and about asset classes can be a powerful combination. In this article, the authors present a framework for combining the two paradigms in an innovative way, resulting in optimal allocations that blend insights from both paradigms. Specifically, their approach derives asset class return prediction from factor-based asset allocation, which allows constructing portfolios for various investment objectives from a unified framework.

Keywords: Factor allocation, Asset allocation

Suggested Citation

Bender, Jennifer and Sun, Le and Thomas, Ric, Asset Allocation vs Factor Allocation – Can We Build a Unified Method? (February 1, 2019). The Journal of Portfolio Management Multi-Asset Special Issue 2019, 45 (2) 9-22; DOI: https://doi.org/10.3905/jpm.2018.45.2.009. Available at SSRN: https://ssrn.com/abstract=3384080

Jennifer Bender (Contact Author)

State Street Global Advisors ( email )

1 Lincoln Street
28th Floor
Boston, MA 02111
United States

Le Sun

Invesco Advisers, Inc.

United States

Ric Thomas

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Abstract Views
102
PlumX Metrics