Quality Assurance: De-Mystifying the Quality Factor in Equities and Bonds
22 Pages Posted: 5 Dec 2017
Date Written: August 9, 2016
Abstract
This paper focuses on the cross-asset class properties of Quality as a factor, particularly its joint behavior across equities and fixed income. The aim is to provide further insight Quality, a relatively newer factor, and to shed light on the implications for portfolio allocation. The results show that the correlation between quality variants in equities and fixed income is actually lower historically than that between equities and fixed income core benchmarks. A 60/40 allocation to the quality cross-asset-class mix offers a statistically significant return with lower tail risk reflecting the greater possible diversification benefits from factor allocations compared to traditional cap-weighted allocations.
Keywords: Quality, Multi-Asset Class, Equities, Bonds, Factor Investing
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