Daily Archives: Nov 30, 2018 at 04:47 am EST

Research Review | 30 November 2018 | Risk Factors

Factor Investing: Get Your Exposures Right!
François Soupé (BNP Paribas Asset Management), et al.
October 26, 2018
This paper is devoted to the question of optimal portfolio construction for equity factor investing. The first part of the paper focusses on how to make sure that a given equity portfolio has the targeted factor exposures, even before imposing any constraints. We show that such portfolios can be derived from mean-variance optimization using stock expected returns as inputs provided these are built in a robust way from information about the factors. We propose a framework to build those robust stock expected returns and show that the targeted factor exposures are retained by the portfolios both before and after applying realistic constraints, e.g. long-only. Other more simplistic approaches fail. In the second part of the paper we illustrate the application of the framework to a practical case where the objectives are, first, to decide about the risk budget allocation to factors in some pragmatic way; and second, to construct a long-only constrained portfolio that retains the targeted exposures to four factors from well-known asset pricing equity models, namely High-minus-Low (HML), Robust-minus-Weak (RMW), Conservative-minus-Aggressive (CMA) and Momentum (MOM).
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Macro Briefing: 30 November 2018

Trade-war risk is top priority at G20 meeting: BBC
Russia-Trump link becomes clear after Michael Cohen’s guilty plea: Bloomberg
Trump cancels meeting with Putin, citing Ukraine confrontation: CNN
PMI shows China’s mfg sector continues to weaken in Nov: Bloomberg
Falling oil prices are putting pressure on junk bond market: NY Times
Fed minutes: policymakers expect a rate hike in December: MW
Pending home sales in US tumbled to four-year low in October: MW
US consumer spending rose sharply in Oct as inflation eased: Bloomberg
Survey: women more pessimistic on US economy compared with men: Axios
US jobless claims rose to 6-month high last week: CNBC