A risk-budgeting framework for the combination of factor equity portfolios

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dc.contributor.advisorMahomed, Obeiden_ZA
dc.contributor.authorWegener, Fergusen_ZA
dc.date.accessioned2016-07-21T14:04:26Z
dc.date.available2016-07-21T14:04:26Z
dc.date.issued2016en_ZA
dc.description.abstractThis dissertation examines a risk-budgeting approach to the construction of factor equity portfolios, proposed by de Carvalho et al. (2014). The approach begins with the construction of active-weighted portfolios with exposure to factors that historically have been linked to excess returns in the market. These factor portfolios are then combined using a risk-budgeting approach. Implied stock-level returns are then estimated using this combined active allocation, and a further optimisation allows for the incorporation of specific investor constraints. The framework constitutes a risk-based approach to portfolio construction in the sense that no direct estimation of expected stock returns is required, but is dependent on a robust estimation of the covariance structure of stock returns. The framework is first evaluated in the context of a simulation study. This section provided confirmation for the risk model estimation methodology used, as well as insight into the intricacies of the framework, in an environment where the underlying structure of data was known. The framework is useful for investors who wish to combine a set of active portfolios, by controlling the allocation of risk, and understanding the exposure of the final portfolio to each of the factor portfolio components. Based on the findings of the simulation study and a back-test of the framework on JSE data, it was found that at the risk-budgeting juncture, the level of prior information imposed (with regard to the performance of factor portfolios) has a significant impact on the performance of final portfolios. In addition, the application of investor constraints, such as long-only and absolute weight limits, ultimately hinder the investor's ability to retain the views taken on in the factor portfolio components. Furthermore, due to significant discrepancies in ex-ante and ex-post tracking error risk measurement, the use of alternative, or adjusted, risk measures is recommended.en_ZA
dc.identifier.apacitationWegener, F. (2016). <i>A risk-budgeting framework for the combination of factor equity portfolios</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/20583en_ZA
dc.identifier.chicagocitationWegener, Fergus. <i>"A risk-budgeting framework for the combination of factor equity portfolios."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016. http://hdl.handle.net/11427/20583en_ZA
dc.identifier.citationWegener, F. 2016. A risk-budgeting framework for the combination of factor equity portfolios. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Wegener, Fergus AB - This dissertation examines a risk-budgeting approach to the construction of factor equity portfolios, proposed by de Carvalho et al. (2014). The approach begins with the construction of active-weighted portfolios with exposure to factors that historically have been linked to excess returns in the market. These factor portfolios are then combined using a risk-budgeting approach. Implied stock-level returns are then estimated using this combined active allocation, and a further optimisation allows for the incorporation of specific investor constraints. The framework constitutes a risk-based approach to portfolio construction in the sense that no direct estimation of expected stock returns is required, but is dependent on a robust estimation of the covariance structure of stock returns. The framework is first evaluated in the context of a simulation study. This section provided confirmation for the risk model estimation methodology used, as well as insight into the intricacies of the framework, in an environment where the underlying structure of data was known. The framework is useful for investors who wish to combine a set of active portfolios, by controlling the allocation of risk, and understanding the exposure of the final portfolio to each of the factor portfolio components. Based on the findings of the simulation study and a back-test of the framework on JSE data, it was found that at the risk-budgeting juncture, the level of prior information imposed (with regard to the performance of factor portfolios) has a significant impact on the performance of final portfolios. In addition, the application of investor constraints, such as long-only and absolute weight limits, ultimately hinder the investor's ability to retain the views taken on in the factor portfolio components. Furthermore, due to significant discrepancies in ex-ante and ex-post tracking error risk measurement, the use of alternative, or adjusted, risk measures is recommended. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - A risk-budgeting framework for the combination of factor equity portfolios TI - A risk-budgeting framework for the combination of factor equity portfolios UR - http://hdl.handle.net/11427/20583 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/20583
dc.identifier.vancouvercitationWegener F. A risk-budgeting framework for the combination of factor equity portfolios. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/20583en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleA risk-budgeting framework for the combination of factor equity portfoliosen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMPhilen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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