Factor Tilts and Asset Allocation

14 Pages Posted: 20 Nov 2019

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2019


Factor investing has received much attention from academics and practitioners, as well as from individual and institutional investors. It has become usual for investors that aim to enhance returns to add to the core of their portfolios a factor satellite, thus tilting their portfolios toward factors that have produced a long-term risk premium. However, in most cases, investors behaving this way are not fully invested in stocks, which begs an interesting question: Should an investor with a two-asset portfolio of broadly-diversified stocks and bonds tilt the stocks slice of his portfolio toward (small-cap and value) factors, or would he be better off by simply increasing the allocation to broadly-diversified stocks in his two-asset portfolio? The results discussed here, based on different samples and sample periods, support the notion of factor-tilting portfolios.

Keywords: factors, smart beta, risk minimization, return maximization

JEL Classification: G11

Suggested Citation

Estrada, Javier, Factor Tilts and Asset Allocation (November 10, 2019). Available at SSRN: https://ssrn.com/abstract=3484496 or http://dx.doi.org/10.2139/ssrn.3484496

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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