Factor tilting for expected utility maximization

Sanne de Boer
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Sanne de Boer: Quantitative Equity Research, ING Investment Management

Journal of Asset Management, 2010, vol. 11, issue 1, No 3, 42 pages

Abstract: Abstract We investigate a strategy of investing in diversified portfolios with a historically optimal factor profile, which we refer to as ‘factor tilting’. The proposed approach approximates the optimal strategy for risk-averse investors under the assumptions of Arbitrage Pricing Theory. Moving beyond traditional mean-variance optimization, it allows the incorporation of any characteristic of the return distribution for a large number of stocks. We propose extensions to incorporate transaction costs and test factor significance.

Keywords: active portfolio management; factor models; arbitrage pricing theory; parametric portfolio policies (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/jam.2009.24

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