BNP Paribas AM: 'Factor investing: get your exposures right!'

BNP Paribas AM: 'Factor investing: get your exposures right!'

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), Robustminus-Weak (RMW), Conservative-minus-Aggressive (CMA) and Momentum (MOM).


Download PDF: 2018-ssrn-factor-investing-get-your-exposures-right-1(..).pdf



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