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Combining factors

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  • Reschenhofer, Christoph

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.

Suggested Citation

  • Reschenhofer, Christoph, 2024. "Combining factors," Economics Letters, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176523005360
    DOI: 10.1016/j.econlet.2023.111510
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    More about this item

    Keywords

    Portfolio construction; Factor investing; Transaction costs; Investment strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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