Dumbmoney, for what it is worth, I don't think what you say is true. I might be considered a "factor enthusiast" in that I believe the academic literature on factors is getting at the truth, and I believe the portfolio that will maximize expected return at a given level of volatility is probably tilted towards factors like small and value. I emphatically do not believe that everyone should be overweight factors. For example, I do not tilt towards any factors and do not think that I should. I think that most people probably should not tilt towards factors.dumbmoney wrote: ↑Sat Dec 26, 2020 8:22 amIf you manage to pin down a factor enthusiast, you find that they do believe that "everyone" should be overweight the factors (except beta). Which is inconsistent with saying that the factors are measures of systemic risk. One way to resolve the contradiction would be to say that beta alone is the best measure of systemic risk, but beta alone is not the best explanation of return.Seasonal wrote: ↑Fri Dec 25, 2020 12:49 pm The question is how much exposure to each factor (source of risk) is appropriate.
The market / representative investor has decided on market cap proportions.
There's a long thread here based on Bill Sharpe's rationale for market proportions. viewtopic.php?t=207804
John Cochrane has a nice paper on the subject of living in a multi-factor world. It concludes "If you're pretty much average, all this thought will lead you right back to holding the market index. To rationalize anything but the market portfolio, you have to be different from the average investor in some
identifiable way." https://eml.berkeley.edu/~craine/EconH1 ... _world.pdf
Eugene Fama more or less invented factor investing, and he has repeatedly said that it is not (and cannot be) the case that everyone should tilt towards any given factor. Cochrane also forcefully argues this point in the exact article Seasonal linked to, and he clearly takes the evidence on factors very seriously.