Swedroe's Factor Based Investing expanded table

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Svensk Anga
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Joined: Sun Dec 23, 2012 5:16 pm

Swedroe's Factor Based Investing expanded table

Post by Svensk Anga » Sat Nov 26, 2016 3:54 pm

Table 9.2 in "Your Complete Guide to Factor-Based Investing" (page 189) has three lines missing. Mr. Swedroe kindly supplied those to to me in a PM. The missing lines, showing portfolio ID, mean return, standard deviation, and Sharpe ratio, are:

P1 6.5% 8.8% 0.74
P2 5.3% 5.5% 0.96
P3 5.6% 5.6% 1.12

The market beta line, for reference was: 8.3%, 20.6%, and 0.40 . So the blended factor portfolios give up on mean return but do substantially better on standard deviation and Sharpe ratio. Note that those are mean returns, not CAGR. The lower SD's for the factor portfolios will make the comparison on CAGR closer.

The expanded table will eventually make it into the print book and the ebook. These values are now written in the margin of my copy.

Random Walker
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Joined: Fri Feb 23, 2007 8:21 pm

Re: Swedroe's Factor Based Investing expanded table

Post by Random Walker » Sat Nov 26, 2016 4:49 pm

Svensk Anga,
Thanks for posting. I think the point you make that CAGR will be even closer than average annual returns is HUGE. Volatility drag on returns is potentially a portfolio killer. I think the biggest benefit of diversification (of all types) is to dampen portfolio volatility and get the CAGR as close to the weighted average annual returns of the portfolio components. Minimizing SD, avoiding tails, diversification benefit, increased portfolio efficiency, whatever one calls it, is really important. Exposure to one type of risk, market beta, with a very inexpensive portfolio, subjects the portfolio to huge volatility drag that can be diversified away by taking on other sources or risk and sources of return. I started a thread on "diversification benefit" last night.

Dave

bdpb
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Re: Swedroe's Factor Based Investing expanded table

Post by bdpb » Thu Oct 11, 2018 11:08 pm

Svensk Anga wrote:
Sat Nov 26, 2016 3:54 pm
Table 9.2 in "Your Complete Guide to Factor-Based Investing" (page 189) has three lines missing. Mr. Swedroe kindly supplied those to to me in a PM. The missing lines, showing portfolio ID, mean return, standard deviation, and Sharpe ratio, are:

P1 6.5% 8.8% 0.74
P2 5.3% 5.5% 0.96
P3 5.6% 5.6% 1.12

The market beta line, for reference was: 8.3%, 20.6%, and 0.40 . So the blended factor portfolios give up on mean return but do substantially better on standard deviation and Sharpe ratio. Note that those are mean returns, not CAGR. The lower SD's for the factor portfolios will make the comparison on CAGR closer.

The expanded table will eventually make it into the print book and the ebook. These values are now written in the margin of my copy.
The table is actually missing four lines. The quality factor is missing, too.

I found 3.8% for mean return and 0.38 for Sharpe ratio in the quality factor chapter but did not find a standard deviation number.

Also, the column labeled "mean return" should probably be "mean premium".

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