Quality Portfolio Different Cap Allocations

How Different Cap Allocations Affects Performance Of Quality Portfolio?

Smart Beta investing is one of the trendiest investment strategies nowadays. Quality is one of the best performing factors, here is one more peace of information to this. In this article, we will look at years of data of stock returns and their risks. So there is three different portfolios for testing: 

  1. Blend of 70% Large Caps and 30% Small Caps  
  1. Blend of 70% Large Caps Quality and 30% Small Caps Quality  
  1. Market  

So basically all three portfolios invest in stocks only, but the difference here is market cap. It is generally perceived, that small cap stocks tend to outperform large caps, so that’s why this research includes 30% of small caps into portfolio composition.  

Interestingly, portfolio with added quality factor earned significantly better results than a market and better results than Blend of 70% Large Caps, 30% Small Caps portfolio. Even more, it took less risks then regular large cap and small cap mix and had the highest Sharpe ratio of all three.  

So does quality factor help investors to achieve greater returns? Yes, it does indeed! 

One more interesting detail from the research: small caps do often categorize for such factors as growth or value, because small companies tend to grow faster and be under looked by investors so they might be trading for less than their intrinsic or fundamental value. 

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