Factor Allocation and Asset Allocation

We examine the time series asset pricing factor returns and their use in a portfolio that varies over time based on an investor's remaining human capital. Using of data for a common set of four different risk factors for the period 1980 to 2013, we show that risk premiums to different factors are not constant over time, and that investors may improve their risk return trade-off by weighting or “tilting” their portfolios as they age. Our results suggest that those investors targeting higher returns should tilt towards the size and value factors, while investors favoring lower levels of risk, should tilt towards quality. Our results raise questions about the current industry approach to asset allocation and the driving forces behind the magnitude of risk premiums over time