- ASRS Background
- Identifying a set of factors
- Comparing Single Factor Indexes
- Multi-Factor Portfolio Construction
- Conculsion
Equity Factor Portfolio Case Study
R/Finance 2017
Ross Bennett
May 19, 2017
Overview
Background
- 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?
spoiler
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 |