Factor Model Selection by Maximum Squared Sharpe Ratio and Target-Date Design

Summary

This literature digest covers two topics. The first evaluates asset-pricing factor models using the maximum squared Sharpe ratio. It describes comparisons among nested models, from CAPM through three-, five-, and six-factor specifications, and non-nested choices within a six-factor model. Those choices include cash versus operating profitability, long-short premiums versus one-sided excess returns, and factor performance across size-based or broader stock universes. The excerpt reports the research questions but gives no numerical results or conclusions about which models prevail.

The second topic is target-date fund design for defined-contribution investors saving toward retirement. It describes dynamic allocation between stocks and bonds, with optimal portfolio risk exposure changing over time and responding sensitively to market and investor assumptions. The digest notes an effort to characterize target-date fund properties and use risk budgeting to shape the glide path. It provides no detailed model, parameter estimates, or evidence that one design is universally best.

Key ideas

• The digest proposes maximum squared Sharpe ratio as a criterion for comparing factor models.
• Its factor comparisons include nested model extensions and alternative factor constructions.
• Target-date funds adjust asset allocation over an investor's time to retirement.
• Optimal risk exposure is described as time-varying and sensitive to assumptions.
• Risk budgeting is presented as an alternative tool for designing a glide path.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.