Category: Portfolio Diversification
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Power-Assisted Diversification: A Goldilocks Approach to Benchmark Diversification
TMA: I am pleased to introduce Dorian (Randy) Young as a contributor. Randy is an independent investment professional living in the Bay Area. Power-Assisted Diversification: Not Too Concentrated and Not Too Diversified Dorian (Randy) Young, CFA, CAIA A number of years ago, as someone proficient with benchmark methodologies, I was asked by an investment measurement…
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The Risk Parity Tower of Babel
Update, Nov. 7 2012: Evidently the interviewer was Bob Litterman, renowned in several areas of quantitative finance, especially for the Black-Litterman model. The first several times I heard of or read about risk parity I was puzzled. The media, it seemed, had distilled descriptions of risk parity into some variation on “a leveraged bond portfolio”…
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Risk parity “unproven”? Where is the list of “proven” allocation strategies?
Just spotted a survey from aiCIO that refers to risk parity as an “innovative but unproven” allocation strategy. The word “unproven” is pejorative and unduly presumptive. Proof of what? Compared to what? Has aiCIO identified examples of “proven” allocation strategies? All allocation strategies of which I’m aware involve investing in assets that entail risk of…
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Risk Parity Portfolio demo workbooks now available
Spurred by some readers, as previously promised I have gone ahead and added some demo Risk Parity Portfolio workbooks to the Resources section.
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If you’re not rebalancing, you’re not diversifying
My brother, not an investment professional, recently asked me whether he ought to rebalance his 401(k) portfolio. The short answer: “Yes!” One of my first projects after business school had to do with assessing the effects of different hypothetical portfolio weighting and rebalancing schemes in an international equity portfolio, using EAFE countries. Tricky to do…
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EDHEC Efficient Equity Indices and Benchmarks
Yesterday I attended a presentation by EDHEC on their Efficient Equity Indices and Benchmarks. Efficient Indices (EI) are a family of equity indices EDHEC created that are alternatives to market capital weighted indices (MCI). One of the most well-known family of non-MCI is Research Affiliates Fundamental Indexes (RAFI), which bases its asset weights on fundamental…
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Risk parity: Why it belongs in your toolkit
Risk Parity portfolios are also known as Equal Risk or Balanced Risk portfolios, because their portfolio risk is balanced equally among their components. If you build investment products, manage client assets, or advise clients on asset allocation, chances are there is a place for Risk Parity among your portfolios. Risk Parity fits best wherever you…
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What does portfolio diversification have to do with fake fireplaces?
Before getting to fake fireplaces, consider the question: Does portfolio diversification work? That is not a rhetorical question. I’ve heard plenty of people declare that portfolio diversification doesn’t work. Not just any people, mind you, but I’ve heard plenty of investment professionals decry portfolio diversification as useless. “It doesn’t work,” they say. Their evidence? The…