Abstract
ABSTRACT This study demonstrates the superiority of a characteristics-based portfolio policy in the Chinese equity market and proposes a novel approach for selecting characteristics. This policy models portfolio weight as a function of firm characteristics and estimates weights by optimizing investor utility. The policy’s performance in China is remarkable: a basic portfolio based on size, book-to-market, momentum, profitability, and investment characteristics achieves a Sharpe ratio of 1.05. A selection method for characteristics is proposed based on the redundancy test of corresponding factors. Selecting characteristics before portfolio construction improves the Sharpe ratio (alpha) of the portfolio by 37.48% (22.17%).
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