PurposeThe purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.Design/methodology/approachExpected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios.FindingsReturn estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types.Originality/valueAlthough the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds.
The Journal of Risk Finance – Emerald Publishing
Published: Mar 18, 2019
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