Many traditional equity managers focus on particular subsets of the investment universe – value or growth stocks, for example – and structure their portfolios from pre-selected groups. A different approach is argued here, one that takes advantage of the widest possible equity universe and...

Firms that use one valuation model for their core portfolio and different models for subsets of that core may end up with multiple estimates of alpha. But as every asset has only one price, doesn't it follow that the asset should have only one mispricing? It is argued here that it hardly makes...

Leverage entails a unique set of risks, such as margin calls, which can force investors to liquidate securities at adverse prices. Modern Portfolio Theory (MPT) fails to account for these unique risks. Investors often use portfolio optimization with a leverage constraint to mitigate the risks of...

This paper presents fast algorithms for calculating mean-variance efficient frontiers when the investor can sell securities short as well as buy long, and when a factor and/or scenario model of covariance is assumed. Currently, fast algorithms for factor, scenario, or mixed factor and scenario...

Smart beta strategies aim to outperform the capitalization-weighted market through relatively simple alternative weighting methods that emphasize a handful of factors such as size, value, momentum, or low volatility. Because of their simplicity, smart beta strategies bear a resemblance to...

The mean-variance-leverage (MVL) optimization model (Jacobs and Levy 2012, 2013a) tackles an issue not dealt with by the mean-variance optimization inherent in the general mean-variance portfolio selection model (GPSM) — that is, the impact on investor utility of the risks that are unique to...

Leverage entails a unique set of risks, such as margin calls, which can force investors to liquidate securities at adverse prices. Investors often seek to mitigate these risks by using a leverage constraint in conventional mean-variance portfolio optimization. Mean-variance optimization,...

With the freedom to sell short, an investor can benefit from stocks with negative expected returns as well as from those with positive expected returns. The benefits of combining short positions with long positions in a portfolio context, however, depend critically on the way the portfolio is...

We consider the optimality of portfolios not subject to short-selling constraints and derive conditions that a universe of securities must satisfy for an optimal active portfolio to be dollar neutral or beta neutral. We find that following the common practice of constraining long–short...

Many years ago, the authors demonstrated that there is much greater dimensionality to the stock market than is suggested by the one-factor capital asset pricing model. Investors today continue to underestimate the market's dimensionality through their recent embrace of “smart beta”...