Combining Factors to Target Specific Investment Outcomes

Posted: {{contentManager.articlePostedDate}} by Fidelity Research Institute

The merits of a factor-based approach to portfolio construction.

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Key Insights

  • When building portfolios with factors, investors can harness the risk and return characteristics of the individual factors themselves and achieve diversification by combining them.
  • A portfolio of six equity factors weighted equally can exhibit compelling results, including positive excess and higher risk-adjusted returns relative to the broader equity market.
  • Equity factor allocations may also be fine-tuned to target specific outcomes, such as capital appreciation, downside protection, and income.
  • Factor combinations can be used to create a core equity portfolio from the ground up, or to complement existing holdings.

Diversification does not ensure a profit or guarantee against a loss.

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