Risk-factor-based Portfolio Optimization

Portfolio managers have generally favoured factor models to interpret and arbitrage abnormal alpha. Duncombe and Kay (2018) proposed an analysis, Two Sigma Factor Lens, to address these issues. In addition to these problems, another challenge is how to dynamically incorporate market upturns and downturns into asset allocation under a multi-factor model, which has attracted a great deal of portfolio managers’ attention. In combining OMG’s current analysis, this proposal will extend the Two Sigma Factor Lens approach to a more general and realistic setting with a hidden Markov process to model the dynamic market states. Given the attractive feature of the multi-factor model in the application of business cycle identifications and abundant literature in academic research (factor investment and regimes in business cycle), some strong and practical results are reasonable to be produced from this project and will benefit OMG.

Faculty Supervisor:

Yonggan Zhao

Student:

Partner:

Owens MacFadyen Group

Discipline:

Business

Sector:

Finance and Insurance

University:

Dalhousie University

Program:

Business Strategy Internship

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