Optimal Tilts: Combining Persistent Characteristic Portfolios

By: Malcolm Baker, Ryan Taliaferro and Terry Burnham

Format:Print
| Language:English

Abstract

We examine the optimal weighting of four tilts in US equity markets from 1968 through 2014. We define a “tilt” as a characteristic-based portfolio strategy that requires relatively low annual turnover. This is a continuum, with small size, a very persistent characteristic, at one end of the spectrum and high frequency reversal at the other. Unlike low-turnover tilts, a full history of transaction costs is essential for determining the expected return of, and hence the optimal allocation to, less persistent, more turnover-intensive characteristics. The mean-variance optimal tilts toward value, size, and profitability are roughly equal to each other and equal to the optimal low beta tilt. Notably, the low beta tilt is not subsumed by the other three.