Skip to content
Empirical Asset Pricing and Factor Investing / Constructing factor portfolios

Portfolio sorts

The factor-mimicking portfolio is only as honest as the sort that builds it. Book-to-price has to be turned into membership, weights, and a rebalance date before any premium is quoted. The value-factor definitions already list the ratios. This note writes the portfolio rule those definitions do not: where the breakpoints sit, which names are eligible, how the legs are weighted, and why the forward window must not overlap the next rebalance.
Learning objectives. By the end of this note you should be able to:
  • specify a book-to-price sort as a holdable book: universe, breakpoint, weight, horizon, and refresh;
  • contrast a two-way size and book-to-market sort, with exchange-specific breakpoints, against a within-sector percentile rank;
  • explain why earnings yield ranks negative earners correctly and why an enterprise ratio is the cleaner cheapness measure in a cyclical sector;
  • read a reported information coefficient as the output of that specification, including a case in which book-to-price itself fails a conventional significance screen.

In this lesson

  1. Two breakpoint rules for the same characteristic
  2. Eligibility, rank, and the ratio that can reverse
  3. What this specification reports for book-to-price

Before you start

The full lesson, with worked examples and exercise solutions, is for members.

Read the full lesson

New to SelfMadeQuant.com? See membership options or browse the Empirical Asset Pricing and Factor Investing syllabus.