RT Journal Article
SR Electronic
T1 Asset Allocation vs. Factor Allocation—<em>Can We Build a Unified Method?</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 9
OP 22
DO 10.3905/jpm.2018.45.2.009
VO 45
IS 2
A1 Jennifer Bender
A1 Jerry Le Sun
A1 Ric Thomas
YR 2018
UL https://pm-research.com/content/45/2/9.abstract
AB There is increasing interest in the idea of allocating across factors instead of across traditional asset classes. Allocating across factors has the intuitive appeal of allocating across building blocks that are in theory purer sources of return. In practice, factor-based allocation is not easy: Factors are unobservable and must be specified. However, the authors believe there is merit in integrating insights from factors with traditional asset allocation. Information and views about factors and asset classes can be a powerful combination. In this article, the authors present a framework for combining the two paradigms in an innovative way, resulting in optimal allocations that blend insights from both paradigms. Specifically, their approach derives asset class return prediction from factor-based asset allocation, which allows construction of portfolios for various investment objectives from a unified framework.TOPICS: Analysis of individual factors/risk premia, portfolio construction