Equity Factor Portfolio Case Study

R/Finance 2017

Ross Bennett

May 19, 2017


  • ASRS Background
  • Identifying a set of factors
  • Comparing Single Factor Indexes
  • Multi-Factor Portfolio Construction
  • Conculsion


  • Arizona State Retirement System (ASRS) total fund ~ $33 billion
    • Investment staff is a team of 10 people, 3-4 focused on equities
  • Project scope
    • Research equity factors
    • Review factor indexes
    • Construct a multi-factor portfolio constrained to U.S. Equity Large and Mid Cap stocks

Factor Zoo

Harvey, Liu, and Zhu (2015) report 59 new factors discovered between 2010 and 2012.

  • Key Criteria
    • Substantiated by academic and practicioner research.
    • Demonstrated historical return premium expected to persist.
    • Investable and defined with a systematic, rules based approach.
  • Academic and practicioner research has identified a set of factors that have been shown to deliver a premium over the long-run.
    • Market, Size, Value, Momentum, Yield, Volatility, Quality, and Liquidity

Are All Single-Factor Indexes Created Equal?


Single-Factor Indexes Are Not Equal

Qualitative Features

  • Similar factor definitions, but unique index construction process across providers.
  • Different universe of assets depending on provider and parent index.

Quantitative Features

  • Risk and return characteristics
  • Caveat of relying on historical backtest data, several of the indexes have less than 5 years of live performance.

SPOILER: No! Do your due dilligence.

Single-Factor Indexes: Size

Annualized Return Annualized Std Dev Annualized Sharpe (Rf=0%)
a 0.1095 0.2136 0.5123
b 0.0967 0.2158 0.4482
c 0.1011 0.2154 0.4693
d 0.1062 0.1932 0.5499
SP500 0.0784 0.1962 0.3996

Single-Factor Indexes: Value