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Betas, Benchmarks and Beating the Market

Zura Kakushadze and Willie Yu

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Abstract: We give an explicit formulaic algorithm and source code for building long-only benchmark portfolios and then using these benchmarks in long-only market outperformance strategies. The benchmarks (or the corresponding betas) do not involve any principal components, nor do they require iterations. Instead, we use a multifactor risk model (which utilizes multilevel industry classification or clustering) specifically tailored to long-only benchmark portfolios to compute their weights, which are explicitly positive in our construction.

Date: 2018-07
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Published in The Journal of Trading 13(3) (2018) 44-66

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