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Factors and Sectors in Asset Allocation: Stronger Together?

Marie Briere and Ariane Szafarz

No 18-016, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing risk premia and so pushing up returns. This suggests that there is room for potentially fruitful combinations of the two styles. Presumably, by combining factors and sectors, investors would benefit both from the diversification potential of the former and the risk premia of the latter. The tests reveal that composite strategies are particularly attractive; they confirm that sector investing helps reduce risksduring crisis periods, while factor investing can boost returns during quiet times.

Keywords: Investment; Asset allocation; Factor; Industry; Sector; Crisis (search for similar items in EconPapers)
JEL-codes: G11 G10 C52 D92 (search for similar items in EconPapers)
Date: 2018-03-29
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