Bridge over ocean
1 November 2014 Financial Analysts Journal Volume 70, Issue 6

Investing in a Multidimensional Market

  1. Bruce I. Jacobs
  2. Kenneth N. Levy

Many years ago, the authors demonstrated that there is much greater dimensionality to the stock market than is suggested by the one-factor capital asset pricing model. Investors today continue to underestimate the market’s dimensionality through their recent embrace of “smart beta” strategies. Such strategies assume a market in which a few chosen factors produce persistent returns. In reality, there are numerous factors that produce returns, which vary over time. Those returns can best be captured by a multidimensional approach that emphasizes diversification across many proprietary factors and continuous adjustment of exposures to those factors.

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