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We examine the performance of risk-optimization techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group stocks based on size, value and momentum characteristics through either independent or dependent sorting. Overall, performing risk-oriented strategies on style portfolios constructed with a dependent sort deliver greater abnormal returns. On average, we observe these strategies to significantly outperform 42% of the risk-oriented ETFs listed on US exchanges, compared to 31% when the risk-oriented strategies are performed on portfolios formed with an independent sort. We attribute the outperformance yielded by dependent sorting to the fact that it provides a better stratification of the set of stocks’ opportunity and diversification properties. Classification Codes: 370, 380 Boris Fays is a PhD candidate at HEC Liège, Management School of the University of Liège. Rue Louvrex 14, Bldg. N1, 4000 Liège, Belgium. E-mail: boris.fays@uliege.be. Phone number: +32 4 232 73 47. Marie Lambert is an Associate Professor of Finance at HEC Liège, Management School of the University of Liège. She is also a Research Associate at EDHEC Risk Institute. Address: HEC Liège, Rue Louvrex 14, Bldg. N1, 4000 Liège, Belgium. E-mail: marie.lambert@uliege.be. Phone number: +32 4 232 74 32. Nicolas Papageorgiou is a Full Professor of Finance at HEC Montreal, and Vice-President and Head of R&D, Fiera Capital Corporation. Mailing address: 3000 Cote Ste Catherine, Montreal, Quebec. E-mail: Nicolas.Papageorgiou@hec.ca Phone number: +1 514 340 7309.

Smart Equity Investing: Implementing Risk Optimization Techniques on Strategic Beta Portfolios