Investment Actions

Case studies in applying factors in
portfolio design

Oct 24, 2017
By Andrew Ang, Bob Bass, Sara Shores

By incorporating factor insights into their asset allocations, we believe that investors can construct better-diversified portfolios that may help them meet specific objectives.

One of the primary goals of the asset allocation process is to construct well-diversified portfolios that are designed to meet risk and return targets in a variety of market and macroeconomic environments.

Unfortunately, portfolios that appear diversified from an asset class perspective may be less diversified than investors think, as their risk is often concentrated in one or more macro factors.

To help diversify their factor exposures, investors must understand which factors they own, which factors they want to own and how to adjust portfolios along factor lines.

To analyze an asset allocation through a factor lens, we need a way to translate seamlessly between assets and factors. Although analyses such as these leverage hundreds of thousands of data points, state of the art tools and models can perform them in a matter of seconds.

Incorporating macro factor insights into the asset allocation process can provide a means to build a diversified portfolio from the ground up or to make adjustments to existing portfolios. Adding a targeted exposure to style factors can introduce an additional potential source of returns.

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