Harvesting Risk Premia for Large Scale Portfolios

An accumulating body of empirical research has found positive gross excess returns from exposure to risk factors (or risk premia). Our study was commissioned by the Norwegian Ministry of Finance to explore factor strategies, through the lens of risk premia indices, for large funds. The paper examines equity risk premia, such as value, size, low volatility and momentum, focusing on return, risk, and investability. For portfolios of large scale, we construct risk premia indices which have historically exhibited strong investability characteristics while still preserving attractive return and risk characteristics. We furthermore find strong support historically for the combination of multiple risk premia indices which may benefit from diversification and natural crossing of trades.