We investigate how transaction costs change the number of characteristics that are jointly significant for an investor's optimal portfolio, and hence, how they change the dimension of the cross section of stock returns. We find that transaction costs increase the number of significant...

A fundamental insight in finance is that there is a strong risk-return tradeoff. Moreira and Muir (2017) challenge this by showing that investors can increase Sharpe ratios by reducing exposure to risk factors when their volatility is high. However, Cederburg, O'Doherty, Wang, and Yan (2020)...