Multifactor Portfolio Research Articles

Multifactor Portfolio Efficiency and Multifactor Asset Pricing

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M. The risk-return relation of the ICAPM is likewise just the application to M of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that M is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that M is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.

A Comparison of Single and Multifactor Portfolio Performance Methodologies

A comparison of single and multifactor portfolio performance methodologies using Value Line and size-ranked portfolios indicates that although both methodologies provide unbi? ased estimates of portfolio performance, there are systematic differences in the power of the two methodologies. The predictive power of the multifactor methodology is superior for well-diversified portfolios but inferior for less diversified portfolios.