Can the Whole Be More Than the Sum of the Parts? Bottom-up versus Top-Down Multifactor Portfolio Construction

The authors compare a bottom-up and a combination approach to allocating factors in a portfolio.  The bottom-up approach calculates security weights as a function of multiple factors simultaneously, while the combination approach combines individual single-factor portfolios.  In their study, they find the bottom-up approach to be superior (on both a nominal and risk-adjusted basis) because it captures the nonlinear cross-sectional interaction effects between factors that the combination approach does not.

BENDER, J., & WANG, T. (2016). Can the Whole Be More Than the Sum of the Parts? Bottom-Up versus Top-Down Multifactor Portfolio Construction. Journal Of Portfolio Management, 42(5), 39-50.