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Capturing Equity Risk Premia

In this paper we examine three approaches for capturing equity risk premia. In the 'simple' approach, the manager goes long stocks with positive exposure and shorts stocks with negative exposure, but makes no effort to control for other exposures or to minimize risk. In the 'pure' approach, the manager selectively retains only exposure to the desired factor, while hedging all other exposures.  In the 'optimized' approach, the manager constructs the minimum-risk portfolio with unit exposure to the desired factor. We document the performance of these three factor approaches for the World factor and the eight GEM2 style factors over the period January 1997 through December 2010.