Investing - Theory, News & General • More Evidence Against Factor Investing

The claimed rationale for SCV is higher expected return due to higher risk. If the odds of SCV doing worse over any given time frame (for example, a long one) are low, then it's hard to maintain that SCV has higher risk.

Over short time frames, higher risk has translated into higher volatility. Over long time frames, it has not underperformed, and by most accounts has outperformed. If the total market folks think it no longer has a premium, do they think it no longer has added risk? Or does SCV confer added risk for no premium? If there’s no added risk anymore because there is no premium, then there should be no harm in tilting towards it.

A SCV portfolio is not very diversified and risks that are diversifiable are not expected to be rewarded under standard investment theory.

What’s your evidence that a SCV portfolio is not very diversified? What is your definition of that word?

One way to look at it is SCV is a small segment of the market - putting all your eggs in one basket is not diversified. You should own some of everything. How much? If markets are efficient and you're not better than the market and choosing or allocating investments, then cap weighted (presuming you're not different from the representative investor in some articulable way).

I was going to quote Cochrane, but see Lastrun already has. Or see viewtopic.php?t=207804.

What's yours?

I would define a “SCV” portfolio as one that has nonzero loading on the market beta factor, and also on small and value.

As such, it should be tracking market beta already. On top of that, it also is exposed to risk associated with the small and value factors and is therefore exposed to more independent drivers of return.

In terms of “diversifiable vs non-diversifiable”, I think of things like a 10-stock portfolio vs VTI. The former has diversifiable risk. Posters with an SCV tilt have thousands of stocks. Many have portfolios that are like 70-80% total market funds plus some SCV fund. They are quite diversified in that sense.

Statistics: Posted by muffins14 — Tue Jan 16, 2024 6:01 am — Replies 51 — Views 2664

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