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A paper submitted by the UvA’s Simon Rottke (ABS Finance Section) and his co-authors Kent Daniel, Lira Mota and Tano Santos has been awarded 2nd place in the ACATIS Value Prize competition.

ACATIS is an investment fund manager that invests in accordance with a value approach, inspired by the philosophy of Warren Buffet. They have awarded the prize for 19 years and honor scientific papers on topics related to 'Value Investing'. The paper challenges the academic and industry standard of constructing characteristic portfolios. These are portfolios of stocks sorted by certain firm characteristics.

In their paper The Cross-Section of Risk and Returns, the authors show that such portfolios contain considerable amounts of unpriced systematic risk. Based on this insight, they propose a methodology to hedge out such unpriced risk and generate what they call characteristic efficient portfolios. Applied to the well-known five Fama-French characteristic portfolios, the methodology increases the annualized squared Sharpe ratio (used to help investors understand the return of an investment compared to its risk) of their optimal combination by more than 80%, from 1.17 to 2.13. The paper has been published in the Review of Financial Studies and can be downloaded on the journal's website.