Combining factors

Christoph Reschenhofer

Economics Letters, 2024, vol. 235, issue C

Abstract: While the academic literature focuses on beta exposure, most practitioners apply characteristics-based scorings to obtain factor portfolios. This paper explores how firm-level characteristics can be combined for optimal factor portfolios. Portfolios encompassing multiple factors are less volatile and have higher after-cost returns than the market or single factor portfolios. We also demonstrate that buy- and sell-thresholds play a critical role in shaping portfolio return, risk, and turnover preferences. Our empirical findings reveal optimal weights for the combination of individual factors, though we acknowledge the 1/N portfolio as a challenging benchmark.

Keywords: Portfolio construction; Factor investing; Transaction costs; Investment strategies (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176523005360

DOI: 10.1016/j.econlet.2023.111510

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