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Interpreting Winner and Loser Portfolios in the WML Factor

Article Quant Q&A · Author: nbbo2
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Summary

The document raises a terminology question about the construction of the developed-market winner-minus-loser (WML) factor in a regional portfolio definition. The stated formula averages the returns of the small and big “High” portfolios and subtracts the average returns of the corresponding “Low” portfolios. The questioner wonders whether those labels should instead say winner and loser, since High and Low can commonly refer to book-to-market sorts.

The material is useful as a reminder to distinguish portfolio dimensions when reading factor definitions: size, momentum ranking, and book-to-market labels can otherwise be confused. However, the document contains only the question and no answer or supporting evidence, so it does not establish whether the published wording is a typo or explain the precise portfolio construction. Readers should consult the factor library’s methodology before interpreting the formula or implementing it.

Key ideas

  • WML is described as the average return of small and big high portfolios minus the corresponding low portfolios.
  • The question is whether “High” and “Low” denote momentum winners and losers or another sorting dimension such as book-to-market.
  • The document provides no answer, so it does not resolve whether the portfolio labels are erroneous.
  • Factor definitions should be checked for how they distinguish size and ranking dimensions before implementation.

Tags

EquitiesFactor investingMomentum
Full text
# WML factor on French's web site


# WML factor on French's web site












On Prof. French's web site we have the following

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_developed.html

> WML is the equal-weight average of the returns for the two winner portfolios for a region minus the average of the returns for the two loser portfolios, WML = 1/2 (Small High + Big High) – 1/2 (Small Low + Big Low).

Is there a typo here? Shouldn't this be

WML = 1/2 (Small Winner + Big Winner) – 1/2 (Small Loser + Big Loser).

To me High/Low means high/low book to market

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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