The Low-Minus-High Portfolio

Category: Finance Brown Bag Seminar
When: 23 May 2019
, 14:00
 - 15:00
Where: HoF E.20 ("DZ Bank")
Speaker: Daniel Andrei

Authors: Daniel Andrei (McGill University), Julien Cujean (University of Berne), Mathieu Fournier (HEC Montréal)

Title: The Low-Minus-High Portfolio

Abstract: Anomalies in the cross section of returns should not be regarded as evidence against the CAPM. Regardless whether the CAPM is rejected for valid reasons or by mistake, a single long-short portfolio will always explain, together with the market, 100% of the cross-sectional variation in returns. Yet, this portfolio need not proxy for fundamental risk. We show theoretically how factors based on valuation ratios (e.g, book-to-market), or on investment rates, can be proxies for this portfolio. More generally, the empiricist can uncover an in nity of proxies for this portfolio, thus unleashing the factor zoo.