We construct portfolios based on characteristic weights and develop a novel way to measure capacity of these portfolios to absorb capital. Our estimates suggest that portfolio capacity is the highest for fundamental-weights, whereas portfolios based on momentum, equal risk budget, and equal...

As in the case with perfect foresight, under conditions of uncertainty investors respond to changes in the assets' relative returns. An increase in the expected return of one asset here typically (if both assets are not perfectly correlated) induces a shift, but not a plunge toward that asset....