TY  - JOUR
AB  - Purpose In capital markets, research risk factor loadings and characteristics are considered as opposing explanations for the cross-sectional dispersion in average stock returns. However, there is little known about the performance an investor would obtain who believes either in the characteristics explanation (CB-investor) or in the risk factor loadings explanation (RB-investor). The purpose of this paper is to compare the performance of CB- and RB-investors.Design/methodology/approach To compare the competing strategies, the authors propose a simple new approach to equity portfolio optimization in the style of Brandt et al. (2009) by modeling the portfolio weight in each asset as a function of the asset's risk factor loadings or characteristics. The authors perform an empirical analysis on the German stock market, exploiting the risk factor loadings from the Carhart (1997) four-factor model and the respective characteristics size, book-to-market equity ratio and momentum.Findings The results show that investment strategies relying on characteristics (particularly on momentum) outperform risk-based investment strategies in horse races. These findings hold in- and out-of-sample. Furthermore, the characteristics-based investment strategies outperform a value-weighted market portfolio strategy in- and out-of-sample.Originality/value The authors introduce a portfolio optimization approach that enables investors to directly link portfolio decisions to the firm’s characteristics or risk factor loadings.
VL  - 17
IS  - 3
SN  - 1526-5943
DO  - 10.1108/JRF-02-2016-0026
UR  - https://doi.org/10.1108/JRF-02-2016-0026
AU  - Fieberg Christian
AU  - Poddig Thorsten
AU  - Varmaz Armin
PY  - 2016
Y1  - 2016/01/01
TI  - An investor’s perspective on risk-models and characteristic-models
T2  - The Journal of Risk Finance
PB  - Emerald Group Publishing Limited
SP  - 262
EP  - 276
Y2  - 2024/04/25
ER  -