This paper examines the potential advantages of factor allocation, taking into account the fact that the reasoning behind doing so is often misguided. The authors examine the sources of error that would indicate why investors would choose to allocate their portfolios to factors instead of assets. The authors also tested whether factor allocation provides noise-reduction benefits or stability benefits, and factor allocation failed to offer either of those two benefits.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
