In this second part of the paper, we build portfolios by combining two factors we have already tested. Through the combination of the second factor, we want to find out, using the strong factors we have already identified if it leads to higher market outperformance more consistently.

To do this, we sorted all the companies in our investment universe by the first factor. We then selected only the companies in the first quintile and then used only this group of companies and sorted them into five quintiles using the second factor. So the two factors were not weighed equally. The first factor in each case had more weight as we only selected the best quintile from this factor to use with the second factor.

We also tested the same factor twice; for example, using price-to-book as the first and second factors. We did this to determine if this combination leads to higher market outperformance than the original one-factor tests. As explained, for the two-factor tests, we did not split the universe into different market capitalizations, as in doing so, we would not have been able to form second-factor quintiles with at least 30 to 40 companies in each quintile.

Overall, we found that all the two factors we tested, even the worst performing quintiles, substantially outperformed the market portfolio.