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An Examination of Traditional Style Indices

Jason Hsu, Vitali Kalesnik and Himanshu Surti
The Journal of Beta Investment Strategies Fall 2010, 1 (2) 14-23; DOI: https://doi.org/10.3905/jii.2010.1.2.014
Jason Hsu
is the CEO of Research Affiliates, LLC, in Newport Beach, CA, and a professor of finance at the UCLA Anderson School of Management in Los Angeles, CA.
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  • For correspondence: hsu@rallc.com
Vitali Kalesnik
is a vice president in Research & Investment Management at Research Affiliates, LLC, in Newport Beach, CA.
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  • For correspondence: Kalesnik@rallc.com
Himanshu Surti
is a research associate in Research & Investment Management at Research Affiliates, LLC, in Newport Beach, CA.
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  • For correspondence: surti@rallc.com
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Abstract

For investors using a core–satellite approach to strategic asset allocation, traditional style indices, such as value and smallcap indices, represent convenient passive vehicles for achieving strategic or even tactical portfolio tilts. In this article, the authors examine traditional style indices using the Fama–French three-factor analysis. They find that most of the style indices exhibit a negative Fama–French alpha and statistically conclude that traditional style indices are suboptimal means for creating style tilts in portfolios. They posit that the source of the sub-optimality comes from the capweighted construction methodology, which these indices are rooted in and demonstrate that using a simple non-priceweighted approach for creating the style indices would result in more efficient exposures.

TOPICS: Style investing, passive strategies, factor-based models, statistical methods

  • Copyright © 2010 Research Affiliates, LLC. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Index Investing: 1 (2)
The Journal of Beta Investment Strategies
Vol. 1, Issue 2
Fall 2010
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An Examination of Traditional Style Indices
Jason Hsu, Vitali Kalesnik, Himanshu Surti
The Journal of Beta Investment Strategies Aug 2010, 1 (2) 14-23; DOI: 10.3905/jii.2010.1.2.014

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An Examination of Traditional Style Indices
Jason Hsu, Vitali Kalesnik, Himanshu Surti
The Journal of Beta Investment Strategies Aug 2010, 1 (2) 14-23; DOI: 10.3905/jii.2010.1.2.014
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  • Article
    • Abstract
    • EMPIRICAL ANALYSES
    • INTERPRETATION
    • A PROPOSAL FOR BETTER STYLE INDICES
    • Appendix
    • ENDNOTES
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