Portfolio selection using new factors based on firm characteristics

Abstract

In this paper, we apply a new factor model to portfolio-selection problems and compare its portfolio investment performance with those of other popular portfolio-selection methods. The new factors are formed from a well-characterized subset of the asset universe based on firm characteristics and exhibit better asset-pricing performance than popular extant asset-pricing factors. The performance comparison shows that the new factors exhibit better portfolio investment performance than alternative methods for various test portfolios and various periods. © 2018, Economic Research Institute of Chung-Ang University.