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Building Single-Factor Portfolios

categories: Americas, Asia Pacific, Australia, EMEAI, GUPTA Abhishek, LODH Ashish, BARMAN Subhajit, Asset Allocation and Asset Liability Management, Factor and Risk Modeling, Investing (Investment Management), Performance Analysis, Portfolio Construction and Optimization, Asset Managers (Quant or Fundamental), Asset Owners, Banks, Hedge Funds, Portfolio Management Analytics, Risk Management Analytics, Equities

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.

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