Positive Portfolio Factors

Stephen J. Brown, William N. Goetzmann, Mark Grinblatt

NBER Working Paper No. 6412
Issued in February 1998
NBER Program(s):   AP

We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpreted in terms of their characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out-of-sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.

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