> math that describes the worst possible outcome
under what model? with which parameters?
> cost of margin
i thought we were talking about levered ETFs, not margin? i don't like margin because i think it is an inefficient use of your risk budget.
regardless if your hedge $BNDW gets wiped out too you've got much bigger problems than money.
> do you have any math [...] how does that square with the claim
do you understand the math underlying markowitz's work? because it follows so directly under his model that constructing an asset allocation with higher risk adjusted returns than the stock market permits lower risk at the same return level that i don't know how to answer.
(in fact, it necessarily permits an interval of leverage to apply in which you beat the stock market on both return and risk)
perhaps you would enjoy https://www.amazon.com/Risk-Return-Analysis-Practice-Rational-Investing-ebook/dp/B00DRC96HG
recall also that (over a single epoch) leverage does not change your risk adjusted returns (assuming you're borrowing at the risk free rate)
If I remember correctly, there are a couple chapters devoted to that in https://www.amazon.com/Risk-Return-Analysis-Practice-Rational-Investing-ebook/dp/B00DRC96HG but the short answer is yes, to the extent that any single period model can be in a multi period context.
Of the five I like market beta the best and don't necessarily see a good reason to overweight the other factors, as they have fairly small explanatory power and are liable to underperform for 40+ years at a time. The mean reversion in market beta, combined with the diversification of treasuries, leveraged up hits the sweet spot (in my opinion) for when it comes to beating the market without overfitting...
And I'd argue that the FF-5 factor is already getting into overfitting territory: what portion of the return variance was explained by the investment factor, again? Like 2%? For adding another dimension to the model?
If you want to do better I would suggest going into direct real estate ownership rather than taking on what might not be compensated concentration risk through factor investment. If you do go for factor investment, I would make sure you consider investigating how well dead-simple trend following methods work on these factors, instead of a constant asset allocation.