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Factor-based Portfolio Management with Corporate Bonds

Demir Bektic

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: Over the past 50 years financial asset pricing theories have evolved from simple single-factor models to more complex multi-factor models. Initially, Sharpe’s (1964) Capital Asset Pricing Model (CAPM) postulated that security markets can be described by a single factor (market beta). The basic premise of the model is that market participants require a risk premium for investing in high-beta assets that are typically considered more risky than low-beta assets. However, in the aftermath of the 2008 global financial crisis, two major trends emerged in the investment industry that laid the groundwork for the rise of factor-based investment strategies: 1) Investors started to evaluate and implement portfolio diversification in terms of underlying systematic risk factors given the failure of active management to provide adequate downside protection. 2) Investors demanded cost-effective, transparent and systematic alternative investment vehicles that could capture most or at least parts of active managers’ excess return. As a consequence, factor-based investing has grown in popularity and rapidly attracted academics, asset managers and institutional investors.

Date: 2018
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