The Cross-Section of Risk and Return / Kent Daniel, Lira Mota, Simon Rottke, Tano Santos.

Format:

Book

Author/Creator:

Daniel, Kent.

Contributor:

National Bureau of Economic Research.

Mota, Lira.

Rottke, Simon.

Santos, Tano.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24164.

NBER working paper series no. w24164

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

In the finance literature, a common practice is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resulting portfolios are likely to capture not only the priced risk associated with the characteristic, but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama and French (2015) characteristic portfolios. The squared Sharpe ratio of the optimal combination of the resulting characteristic efficient portfolios is 2.16, compared with 1.16 for the original characteristic portfolios.

Notes:

Print version record

December 2017.