Risk-Based and Factor Investing

Emmanuel Jurczenko

• Publisher: ISTE Press - Elsevier
• Year: 2015
• ISBN:
  9780081008119
• Topic: Desarrollo personal
• Subtopic: Finanzas personales

This book is a compilation of recent articles written by leading academics and practitioners in the area of risk-based and factor investing (RBFI).

The articles are intended to introduce readers to some of the latest, cutting edge research encountered by academics and professionals dealing with RBFI solutions. Together the authors detail both alternative non-return based portfolio construction techniques and investing style risk premia strategies.

Each chapter deals with new methods of building strategic and tactical risk-based portfolios, constructing and combining systematic factor strategies and assessing the related rules-based investment performances. This book can assist portfolio managers, asset owners, consultants, academics and students who wish to further their understanding of the science and art of risk-based and factor investing.

• Contains up-to-date research from the areas of RBFI
• Features contributions from leading academics and practitioners in this field
• Features discussions of new methods of building strategic and tactical risk-based portfolios for practitioners, academics and students

1

Advances in Portfolio Risk Control

Winfried G. Hallerbach* ^* Robeco Asset Management

Abstract

Spurred by the increased interest in applying “risk control” techniques in an asset allocation context, we offer a practitioner’s review of techniques that have been newly proposed or revived from academic history. We discuss minimum variance, “1/N” or equal-weighting, maximum diversification, volatility weighting and volatility targeting – and especially equal risk contribution or “risk parity”, a concept that has become a real buzz word. We start from a taxonomy of risk control techniques. We discuss their main characteristics and their positives and negatives and we compare them against each other and against the maximum Sharpe ratio (SR) criterion. We illustrate their implications by means of an empirical example. We also highlight some key papers from the vast and still growing literature in this field. All in all, we aim to provide a practical and critical guide to risk control strategies. It may help to demystify risk control techniques, to appreciate both the “forest” and “trees” and to judge these techniques on their potential merits in practical investment applications.

Keywords

Equal risk contribution portfolio (ERCP)

Equal-weighting

Inverse volatility portfolio (IVP)

Maximum diversification portfolio (MDP)

Maximum Sharpe ratio portfolio (MSRP)

Minimum variance portfolio (MVP)

Money allocation

Portfolio risk control

Risk allocation

Volatility

Spurred by the increased interest in applying “risk control” techniques in an asset allocation context, we offer a practitioner’s review of techniques that have been newly proposed or revived from academic history. We discuss minimum variance, “1/N” or equal-weighting, maximum diversification, volatility weighting and volatility targeting – and especially equal risk contribution or “risk parity”, a concept that has become a real buzz word. We start from a taxonomy of risk control techniques. We discuss their main characteristics and their positives and negatives and we compare them against each other and against the maximum Sharpe ratio (SR) criterion. We illustrate their implications by means of an empirical example. We also highlight some key papers from the vast and still growing literature in this field. All in all, we aim to provide a practical and critical guide to risk control strategies. It may help to demystify risk control techniques, to appreciate both the “forest” and “trees” and to judge these techniques on their potential merits in practical investment applications.

1.1 Introduction

Recently, there has been increased interest in applying “risk control” techniques in an asset allocation context. Some examples of techniques that have been newly proposed or revived from academic history are “1/N” or equal-weighting, minimum variance, maximum diversification, volatility weighting and volatility targeting – and especially equal risk contribution or “risk parity”, a concept that has become a real buzz word. In this chapter, we start from a taxonomy of risk control techniques. We discuss their main characteristics and their positives and negatives, we compare them against each other and against the maximum Sharpe ratio (SR) criterion and we illustrate their implications by means of an empirical example. We also highlight some key papers from the vast and still growing literature in this field. All in all, we aim to provide a practical and critical guide to risk control strategies that may help to appreciate both the “forest” and “trees” and to judge these techniques on their a...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Acknowledgements
• Preface
• 1: Advances in Portfolio Risk Control
• 2: Smart Beta: Managing Diversification of Minimum Variance Portfolios
• 3: Trend-Following, Risk-Parity and the Influence of Correlations
• 4: Diversifying Risk Parity: In Today, Out Tomorrow?
• 5: Robust Portfolio Allocation with Systematic Risk Contribution Restrictions
• 6: Risk-Based Investing but What Risk(s)?
• 7: Target Volatility
• 8: Smart Beta Equity Investing Through Calm and Storm
• 9: Solving the Rebalancing Premium Puzzle
• 10: Smart Betas: Theory and Construction
• 11: Low-Risk Anomaly Everywhere: Evidence from Equity Sectors
• 12: The Low Volatility Anomaly and the Preference for Gambling
• 13: The Low Beta Anomaly and Interest Rates
• 14: Factoring Profitability
• 15: Deploying Multi-Factor Index Allocations in Institutional Portfolios
• 16: Defining the Equity Premium, a Framework
• 17: Designing Multi-Factor Equity Portfolios
• 18: Factor Investing and Portfolio Construction Techniques
• 19: Multi-Factor Portfolio Construction for Passively Managed Factor Portfolios
• 20: Statistical Overfitting and Backtest Performance
• List of Authors
• Index