Pursuing Multiple Premiums: Combination vs. Integration

Abstract

This paper compares two different approaches to pursue multiple premiums: a combination approach (market portfolio plus factor portfolios) and a fully integrated approach. We evaluate the two approaches via multiple lenses: pursuit of higher expected returns, distribution of over- and underweights, turnover, and costs. Our analysis shows the integrated approach can lead to greater reliability of outperformance, better risk control, and lower costs. These benefits are critical to an efficient pursuit of multiple premiums and cannot be replicated through combination approaches.