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Malcolm Baker, Terence Burnham and Ryan Taliaferro
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Malcolm Baker: Harvard Business School, Acadian Asset Management, and NBER
Terence Burnham: Chapman University Argyros School of Business and Economics
Ryan Taliaferro: Acadian Asset Management

Working Papers from Chapman University, Economic Science Institute

Abstract: We examine the optimal weighting of four characteristic tilts in US equity markets over the period from 1968 through 2014. We define a “tilt” as a positive-Sharpe-ratio, characteristicbased portfolio strategy that requires relatively low annual turnover and a “trade” as a characteristic-based portfolio strategy that requires relatively high annual turnover and liquidity demands. Size is a tilt, because of its very low turnover; high frequency reversal is a trade. This dichotomy is necessary to make practical use of Fama-French style factor regressions. Unlike low-turnover tilts, a full history of transaction costs and an estimate of capacity is critical to determine the expected return, and hence the optimal allocation and explanatory power of trades. The mean-variance optimal tilts toward value (20%), size (26%), and profitability (23%) are roughly equal to each other and to the optimal low beta tilt (24%). The remaining 7% is allocated to bond market factors. Notably, in an apples-to-apples comparison, the low beta tilt is not subsumed by other tilts. Rather, it is the second highest of the four.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:16-33

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