Lets say I want to estimate a replicating portfolio by doing a linear regression between the returns of a long-only portfolio and several long-short factors like Fama-French 5-factor or Betting Against Beta (CAPM framework).

I discover that I can replicate and explain about 60% of the variance in my long-only portfolio ($R^2$ of ~0.6) with 3 significant coefficients to some of the long-short factors mentioned above. Does this comparison even make sense when replicating a long-only strategy with multiple long-short strategies?



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.