Diversification and the Optimal Construction of Basis Portfolios
Nontrivial diversification possibilities arise when a factor model describes security returns. This paper catalogs the merits of alternative strategies for constructing basis portfolios to mimic the common factors. We show how to use the X² statistic for the joint significance of mean basis portfoli...
| Veröffentlicht in: | Management Science. - Institute for Operations Research and the Management Sciences, 1954. - 51(2005), 4, Seite 581-598 |
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| Format: | Online-Aufsatz |
| Sprache: | English |
| Veröffentlicht: |
2005
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| Zugriff auf das übergeordnete Werk: | Management Science |
| Schlagworte: | basis, Fama-MacBeth, mimicking, minimum idiosyncratic risk portfolios principal components maximum likelihood factor analysis approximate factor structure arbitrage pricing theory (APT) diversification cross-sectional regression ordinary and weighted least squares large cross-sections bootstrapping mehr... |
| Zusammenfassung: | Nontrivial diversification possibilities arise when a factor model describes security returns. This paper catalogs the merits of alternative strategies for constructing basis portfolios to mimic the common factors. We show how to use the X² statistic for the joint significance of mean basis portfolio returns to rank alternative procedures and the bootstrap to perform inferences on the disparity between X² statistics across portfolio formation procedure, estimation method, cross-section size, and number of factors. Our main conclusion is that maximum likelihood factor analysis coupled with minimum idiosyncratic risk portfolio formation yields economically and statistically superior basis portfolios compared with those derived from asymptotic principal components. |
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| ISSN: | 15265501 |