Diversification Across Characteristics Results in Superior Returns

By on March 17, 2010

Erik Hjalmarsson, Winston Capital Management, studied long-short portfolio strategies formed on seven different stock characteristics representing various measures of past returns, value, and size. Hjalmarsson’s conclusions:

Each individual characteristic results in a profitable portfolio strategy, but these single-characteristic strategies are all dominated by a diversified strategy that places equal weight on each of the single-characteristic strategies. The benefits of diversifying across characteristic-based long-short strategies are substantial and can be attributed to the mostly low, and sometimes substantially negative, correlation between the returns on the single-characteristic strategies.

Source: Social Science Research Network

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