Factor Tilts and Asset Allocation

12 Pages Posted: 13 Jan 2021

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2020

Abstract

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 the portfolio toward (small-cap and value) factors, or would the investor be better off simply increasing the allocation to broadly diversified stocks in the two-asset portfolio? The results discussed here, based on different samples and sample periods, support the notion of factor-tilting portfolios.

Keywords: Factor Tilts, Asset Allocation, Factor Investing

JEL Classification: G10, G!1

Suggested Citation

Estrada, Javier, Factor Tilts and Asset Allocation (October 1, 2020). Journal of Investment Consulting, Vol. 20, No. 1, 2020, pp. 30-39, Available at SSRN: https://ssrn.com/abstract=3753728

Javier Estrada (Contact Author)

IESE Business School ( email )

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

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