摘要：In this paper, the possibility of using fundamental weighting as a tool to intentionally tilta portfolio toward specific and unobservable risk factors in the illiquid and undeveloped Croatianstock market is explored. Thus far, fundamental-weighting has been shown to be able to outperformthe cap-weighted index in such environments but no attempt regarding control for implicit factorexposure of such portfolios has been reported. Therefore, in this study principal component analysisis performed to capture the underlying risk factors of the fundamentally-weighted portfolio in orderto optimize the portfolio’s performance by minimizing its volatility. Previous attempts focusingpurely on portfolio risk reduction by estimating minimum variance portfolios failed both froman in-sample and out-of-sample perspective. Results in this study are based on 22 in-sample andout-of-sample tests in the period from March 2009 till March 2020. On the in-sample estimationbasis, the proposed approach significantly improves the portfolio’s performance and, if restrictionsto weights are imposed, it can outperform the cap-weighted benchmark. However, out-of-sampletesting yielded poor results both in terms of risk and return. Such results are in contrast to findingsfor the developed markets but corroborate the claim that a broad investment base is needed forsuccessful risk exposure in the long run.
