The Low-Minus-High Portfolio and the Factor Zoo

50 Pages Posted: 4 Dec 2019

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Julien Cujean

Institute for Financial Management

Mathieu Fournier

HEC Montreal

Multiple version iconThere are 2 versions of this paper

Date Written: November 2019

Abstract

Regardless of 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, which we coin the "Low-Minus-High (LMH) 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 the LMH portfolio. More generally, the empiricist can uncover an infinity of proxies for the LMH portfolio, thus unleashing the factor zoo.

Suggested Citation

Andrei, Daniel and Cujean, Julien and Fournier, Mathieu, The Low-Minus-High Portfolio and the Factor Zoo (November 2019). CEPR Discussion Paper No. DP14153, Available at SSRN: https://ssrn.com/abstract=3496643

Daniel Andrei (Contact Author)

McGill University ( email )

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

Desautels Faculty of Management ( email )

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

Julien Cujean

Institute for Financial Management ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland
3012 (Fax)

Mathieu Fournier

HEC Montreal ( email )

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

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