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Factor Construction: Portfolio Scenarios

How Many Stocks Are Needed to Capture Factor Returns?

Nicolas Rabener
10 min read
22 Nov 2017

SUMMARY

  • Most researchers create factor portfolios by taking the top & bottom 30% of stocks, which results in large portfolios
  • Portfolios can be reduced, but firm risks start influencing factor returns with too few stocks
  • Most investors are likely better of buying factor products then building factor portfolios themselves

INTRODUCTION

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