Application of a Multifactor Model in Enhanced Index Fund: Performance Analysis in China

The paper aims to explore the potential for outperformance of the enhanced index fund constructed using a multifactor model that has been widely used by practitioners. By presenting an empirical implementation of the factor model to construct the enhanced index fund based on the component stocks of the Shanghai Stock Exchange 50 (SSE50) index, the paper also identifies significant factors to explain excess return on securities in the Chinese market. By introducing an ad hoc weight-allocating approach, the paper constructs the enhanced index fund that can deliver a higher active return and information ratio and lower tracking error through an optimal mix of the benchmark weight and renewal rate obtained from backtesting results.