Is There a Better Way To Build a Portfolio?
Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can pursue higher expected returns by structuring their portfolio around these dimensions.
Dimensions must first be well documented in markets around the world and across different time periods. To be captured in diversified portfolios, they must be sensible, backed by data, and cost effective. Investors can pursue higher expected returns through a low-cost, well-diversified portfolio that targets these dimensions.
2. Price-to-Book Ratio: A company’s capitalization divided by its book value. It compares the market’s valuation of a company to the value of that company as indicated on its financial statements.
3. Profitability: A measure of a company’s current profits. We define this as operating income before depreciation and amortization minus interest expense, scaled by book equity.