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Betas, Benchmarks and Beating the Market

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  • Zura Kakushadze
  • Willie Yu

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.

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  • Zura Kakushadze & Willie Yu, 2018. "Betas, Benchmarks and Beating the Market," Papers 1807.09919, arXiv.org.
    • Handle: RePEc:arx:papers:1807.09919
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    References listed on IDEAS

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    1. Zura Kakushadze & Willie Yu, 2016. "Statistical Industry Classification," Journal of Risk & Control, Risk Market Journals, vol. 3(1), pages 17-65.
    2. Trzcinka, Charles A, 1986. "On the Number of Factors in the Arbitrage Pricing Model," Journal of Finance, American Finance Association, vol. 41(2), pages 347-368, June.
    3. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    4. Geweke, John & Zhou, Guofu, 1996. "Measuring the Pricing Error of the Arbitrage Pricing Theory," The Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 557-587.
    5. Zura Kakushadze & Willie Yu, 2018. "Notes on Fano Ratio and Portfolio Optimization," Journal of Risk & Control, Risk Market Journals, vol. 5(1), pages 1-33.
    6. Connor, Gregory & Korajczyk, Robert A, 1993. "A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-1291, September.
    7. Fabozzi, Frank J. & Francis, Jack Clark, 1978. "Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(1), pages 101-116, March.
    8. Zura Kakushadze & Willie Yu, 2017. "Notes on Fano Ratio and Portfolio Optimization," Papers 1711.10640, arXiv.org, revised Apr 2018.
    9. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    10. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
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