How to choose a strategic multi-factor equity portfolio
In this paper, we present two strategic multi-factor equity portfolios that combine four well-documented return sources: Value, Momentum, Quality, and Low Volatility to meet two distinct objectives. We propose a robust and flexible framework that uses the principles of modern portfolio theory and reduces the sensitivity to the estimation error. Among other considerations, we believe investors can choose to focus on active risk return trade-offs or absolute risk return trade-offs. That is why, in this paper, we present two Strategic Portfolios: IR Portfolio (Information Ratio Portfolio) and SR Portfolio (Sharpe Ratio Portfolio). Their framework moves away from single-point estimates and captures the high-level relationships of return sources through a ranking approach. These high level relationships have shown to hold through time and allow for consistent exposures through time. We also present the results for alternative weighting schemes such as equal-weight, minimum variance, maximum diversification, minimum correlation and risk parity.