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Building Single-Factor Portfolios

In this study, we focus on some of the issues investors face when constructing long-only non-optimized single-factor portfolios using simple heuristics-based rank-select-weight algorithms. In doing so, investors may ask: Should they start from a universe of securities with a fixed target-market-cap coverage or a fixed number of securities? Should they assess factor exposure based on single or multiple factor descriptors? How broad a subset of securities will they use from the underlying universe? What are the pros and cons of different portfolio-weighting schemes? We show such choices would have impacted target-factor capture, exposure to non-target factors, concentration and investability.