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Positive Portfolio Factors

Author

Listed:
  • Stephen J. Brown

    (NYU Stern School of Business)

  • William N. Goetzmann

    (Yale School of Management, International Center for Finance)

  • Mark Grinblatt

    (University of California, Los Angeles - Finance Area)

Abstract

We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpretable in terms of the characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out of sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.

Suggested Citation

  • Stephen J. Brown & William N. Goetzmann & Mark Grinblatt, 2004. "Positive Portfolio Factors," Yale School of Management Working Papers ysm27, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm27
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    2. Brown, Stephen J. & Lajbcygier, Paul & Wong, Woon Weng, 2012. "Estimating the cost of capital with basis assets," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3071-3079.

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