The Profitability Puzzle: Incorporating profitability as a risk factor

Explore Timeline's latest research on incorporating profitability as a risk factor in equity portfolios. Discover the unique role of profitability and its impact on performance. Download the full paper for detailed insights.

Explore Timeline's latest research paper, which takes a deep dive into the profitability risk factor, building on previous work on Risk Factors where we treated profitability and quality as interchangeable.

In this paper, we start by clarifying the difference between Quality and Profitability as distinct risk factors. While they share similarities, our research shows that each has its unique characteristics and implications. Our empirical analysis highlights profitability's unique role as a significant risk factor, distinct from other Quality metrics.

We then investigate why most traditional small-cap, value-focused portfolios often struggle with low profitability and explore whether incorporating high profitability into a value strategy could be beneficial.

Finally, we examine how blending profitability with value and size strategies in an equity portfolio might enhance performance. Our findings suggest that combining securities with value, size, and profitability traits could be the key to achieving better risk-adjusted returns.

For a detailed analysis and insights, download the full paper here.

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