PT  - JOURNAL ARTICLE
AU  - Carol Alexander
AU  - Anca Dimitriu
TI  - Sources of Outperformance in Equity Markets
AID  - 10.3905/jpm.2004.170
DP  - 2004 Jul 31
TA  - The Journal of Portfolio Management
PG  - 170--185
VI  - 30
IP  - 4
4099  - https://pm-research.com/content/30/4/170.short
4100  - https://pm-research.com/content/30/4/170.full
AB  - The general portfolio construction model described here is designed to replicate the first principal component of a group of stocks instead of a traditional benchmark, thus capturing only the common trend in stock returns. Reduction of the noise in stock returns facilitates the replication considerably, and the optimal portfolio structure is very stable. Analysis of the portfolio performance over different time horizons in European and U.S. equity markets reveals a time-varying structure. Throughout most of the period studied, the portfolio’s value component dominated the market and the volatility components, but during the volatile periods of the last few years the strategy earned a significant volatility premium. One explanation for the mean-reversion is behavioral; portfolio performance is influenced by the extent of investor herding toward the common trend in stock returns.