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Factor tilting for expected utility maximization

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  • Sanne de Boer

    (Quantitative Equity Research, ING Investment Management)

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.

Suggested Citation

  • Sanne de Boer, 2010. "Factor tilting for expected utility maximization," Journal of Asset Management, Palgrave Macmillan, vol. 11(1), pages 31-42, April.
    • Handle: RePEc:pal:assmgt:v:11:y:2010:i:1:d:10.1057_jam.2009.24
    DOI: 10.1057/jam.2009.24
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    References listed on IDEAS

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    9. Gur Huberman & Zhenyu Wang, 2005. "Arbitrage pricing theory," Staff Reports 216, Federal Reserve Bank of New York.
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