A comprehensive examination of long-only factor investment strategies for the Korean stock market is presented. Negative exposures to unintended factors that detract from the expected factor risk premium are identified. These constituents with large negative exposures are then removed from the factor portfolio that establishes substantial performance improvement in factor-based investing. Results show that risk premia exist for the size, value, momentum, profitability and low risk factors in the Korean market with the size factor producing the largest return.
Multifactor portfolios based on the two prevalent approaches are also investigated. One is based on mixing portfolios and the other is based on combining signals with the latter often perceived as the more effective approach. Our results indicate that if negative exposures are shaved off in the portfolios, then simply mixing these portfolios can provide superior return performance than the combining signals approach.