lol I know you are. But sometimes not all the readers of a thread have had a chance to learn about some of the really good papers.Thanks I agree that is a helpful article. I am quite familiar with the concepts regarding CAPM and the additional steps taken in F-F to add explanatory power to the model.John Cochrane wrote an article many years ago . . .I myself have not been able to understand either the meaning of risk or the concept of diversification in the context of factors. Both risk and diversification need quantifiable definition in order to have that conversation. The observation that a tilted portfolio is first of all a concentration relative to the cap weighted market is, of course, naively true, and has to be dealt with. I have the idea that data shows that concentration in size and value assets using long only portfolios results in higher portfolio standard deviation of annual returns, hence increased portfolio risk by that definition. I don't know about higher returns these days. In the original Fama French data the factors had positive contributions to the return. I don't know how volatility ran in that data set.Factor investing actually involves concentrating your portfolio into a small subset of the market, increasing your risk, with the hope of getting higher return.The Total Market Index Fund primarily exposes you to the risk of large-cap companies, as it's heavily weighted towards the biggest stocks. Swedroe believes that adding exposure to other factors can reduce this concentration and diversify your risk.
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Statistics: Posted by folkher0 — Fri Aug 16, 2024 3:36 pm