In this article, we extend the standard paradigm for portfolio stress testing in two ways. First, we introduce a structured set of tools that enable investors to envision and administer extreme scenarios. We show how to take account of historical and hypothetical covariance matrices in scenario...

We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second,...

The authors extended the standard paradigm for portfolio stress testing in two ways. First, they introduced a toolkit that enables investors to envision and administer extreme scenarios. The risk model is integral to the stress test. They demonstrated the substantial impact of using historical...

An influential observation has the potential to render a model unsuitable for estimation with an OLS regression. This is well known in the statistics literature. However, the use of standard measures for detecting and managing influential observations is not common practice in empirical finance....

Recent studies in financial economics posit a connection between a gross prof- itability strategy and quality investing. We explore this connection with two widely used factor models. The first is the four-factor Fama-French-Carhart model, which is a mainstay of empirical research in academia....

A long-only investable minimum variance strategy outperformed the S&P 500 over the four decades from January 1973 to December 2012. Through the lens of a factor model, we show this outperformance can be largely attributed to implicit style bets. Specifically, minimum variance has thrived by...

Factor models are standards in investment management. For decades, Barra factor models have provided valuable risk forecasts and inputs for the portfolio construction process. Most uses of factor models have targeted longer horizons of months or years. However, we demonstrate in this paper that...

An extended history of market returns reveals aspects of financial risk that are not evident over short timescales. The most enduring risk measure is variance, which quantifies short-term regularities in return dispersion. An alternative measure, shortfall, quantifies the risk of extreme market...