Smart Equity Investing: Implementing Risk Optimisation Techniques on Strategic Beta Portfolios

We examine the performance of risk-optimisation techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group sto ...

Author(s):

Boris Fays

PhD candidate, HEC Liège

Marie Lambert

Associate Professor of Finance, HEC Liège
Research Associate, EDHEC-Risk Institute

Nicolas Papageorgiou

Professor of Finance, HEC Montreal

We examine the performance of risk-optimisation techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group stocks based on size, value and momentum characteristics through either independent or dependent sorting. Overall, performing risk-oriented strategies on style portfolios constructed with a dependent sort deliver greater abnormal returns. On average, we observe these strategies to significantly outperform 42% of the risk-oriented ETFs listed on US exchanges, compared to 31% when the risk-oriented strategies are  performed on portfolios formed with an independent sort. We attribute the outperformance yielded by dependent sorting to the fact that it provides a better stratification of the set of stocks’ opportunity and diversification properties.

Type: Working paper
Date: le 02/01/2018
Research Cluster : Finance

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