Abstract
Factor indexes are popular with both institutional and retail investors, who are increasingly using multifactor index allocations in pursuit of more reliable returns and the benefits of diversification. “Most multifactor indexes are constructed in a simple, straightforward way, using a static, equal-weighting scheme,” says <b>Mehdi Alighanbari</b>. “We wondered if we could do better with a more sophisticated and dynamic adjustment of factors over time.” Alighanbar and <b>Chin Ping Chia</b>, both of <b>MSCI</b>, compared the risk and return characteristics of five static and three dynamic weighting strategies to a base case, equal-weighted strategy over a period of 36 years. The authors found that, historically, a simple diversification strategy has outperformed other more complex strategies (especially after accounting for turnover costs.)
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