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The Journal of Index Investing

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How to Choose a Strategic Multifactor Equity Portfolio?

James Barber, Scott Bennett and Evgenia Gvozdeva
The Journal of Beta Investment Strategies Fall 2015, 6 (2) 34-45; DOI: https://doi.org/10.3905/jii.2015.6.2.034
James Barber
is chief investment officer of equities for Russell Investments in Seattle, WA.
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  • For correspondence: jbarber@russell.com
Scott Bennett
is director of equity strategy and research for Russell Investments in Seattle, WA.
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  • For correspondence: sbennett@russell.com
Evgenia Gvozdeva
is senior quantitative research analyst for Russell Investments in Seattle, WA.
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  • For correspondence: egvozdeva@russell.com
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Abstract

The authors present two strategic multifactor equity portfolios that combine four well-documented return sources: Value, Momentum, Quality, and Low Volatility to meet two distinct objectives. They propose a robust and flexible framework that uses the principles of modern portfolio theory and reduces the sensitivity to the estimation error. The paper should be of interest to your readers (and their clients) with longer investment horizons who look to allocate capital to factor indexes.

Among other considerations, the authors believe investors can choose to focus on active risk return tradeoffs or absolute risk return tradeoffs. That is why, in this paper, they present two Strategic Portfolios: IR Portfolio (Information Ratio Portfolio) and SR Portfolio (Sharpe Ratio Portfolio). Their framework moves away from single-point estimates and captures the high-level relationships of return sources through a ranking approach. These high-level relationships have shown to hold over time and allow for consistent exposures over time. They also present the results for alternative weighting schemes, such as equal-weight, minimum variance, maximum diversification, minimum correlation, and risk parity.

TOPICS: Mutual funds/passive investing/indexing, analysis of individual factors/risk premia, portfolio theory

  • © 2015 Pageant Media Ltd
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The Journal of Index Investing: 6 (2)
The Journal of Beta Investment Strategies
Vol. 6, Issue 2
Fall 2015
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How to Choose a Strategic Multifactor Equity Portfolio?
James Barber, Scott Bennett, Evgenia Gvozdeva
The Journal of Beta Investment Strategies Aug 2015, 6 (2) 34-45; DOI: 10.3905/jii.2015.6.2.034

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How to Choose a Strategic Multifactor Equity Portfolio?
James Barber, Scott Bennett, Evgenia Gvozdeva
The Journal of Beta Investment Strategies Aug 2015, 6 (2) 34-45; DOI: 10.3905/jii.2015.6.2.034
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  • Article
    • Abstract
    • RETURN SOURCES
    • MULTIFACTOR PORTFOLIO: ALLOCATION FRAMEWORK
    • GENERAL CHARACTERISTICS OF STRATEGIC PORTFOLIOS RELATIVE TO RUSSELL GLOBAL LC INDEX
    • FACTOR COMBINATION CONSIDERATIONS
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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