Betas, Benchmarks and Beating the Market
We give an explicit formulaic algorithm and source code for building
long-only benchmark portfolios and then using these benchmarks in long-only
market outperformance strategies. The benchmarks (or the corresponding betas)
do not involve any principal components, nor do they require iterations.
Instead, we use a multifactor risk model (which utilizes multilevel industry
classification or clustering) specifically tailored to long-only benchmark
portfolios to compute their weights, which are explicitly positive in our