Risk and Portfolio Construction - Articles & White Papers
White papers and articles on portfolio construction and risk management for investment managers. Maintaining an appropriately diversified portfolio, managing portfolio risk, and controlling the risk/reward characteristics of a fund are essential basics for money managers. Academic papers on portfolio optimization are particularly helpful in this regard. The most frequently downloaded... research in this section relates to reports on measuring investment risk, for instance: analysis of the time horizon over which risk is best estimated, and using risk factors as building blocks for portfolio diversification. Papers on tracking error have been well received as have papers on tail risk and fat tails. A number of articles in this section argue the case for concentrated portfolios and a need for more active management. Surveys on risk management and risk management systems have proved popular, enabling members to understand the risk practices employed by their peers. Other research on portfolio risk in this section includes papers on low volatility investing, equity risk premia, risk parity, models for forecasting asset class risk and the capital asset price model (CAPM).
With the rise of Options and options-based investment strategies, it is important to understand the differences in the options-based space: drivers of risk and return, different objectives, use of leverage, and more. In this latest research paper from Swan Global Investments, titled "Know What You Own", the authors unpack…
See how the S&P Risk Parity Indices use futures to represent multiple asset classes and attempt to reflect the risk/return characteristics of funds offered in the risk parity space.
Traditional portfolio optimization processes have several well-known shortcomings. Consequently, investors often significantly constrain the optimization, resulting in little new information. One solution to overcome these limitations is a Step Optimization routine. In this paper, we will discuss how visualizing changes to…
BlackRock sees a growing disconnect between waning market attention to its top 10 geopolitical risks and the likelihood of some of them escalating. BlackRock’s Geopolitical Risk Indicator (BGRI) has declined since the last update, suggesting the market’s attention to geopolitical risks overall has edged down. Yet the overall…
Each quarter we share our perspective on the current stability of the global equity markets using five reliable indicators of equity market strain. This quarterly report assesses the stability of five equity markets: • Global Equities • Non-U.S. Equities • U.S. Equities • European Equities • Emerging Markets Equities Our…
Each quarter we share our perspective on the current stability of the global equity markets using five reliable indicators of equity market strain. This quarterly report assesses the stability of five equity markets: • Global Equities • Non-U.S. Equities • U.S. Equities • European Equities • Emerging Markets Equities Our…
Over the last five years, many institutional portfolios have made the structural shift toward higher allocations to real assets. This paper by JP Morgan Asset Management addresses how public pension plans specifically can build or enhance their real asset portfolios.
In this research paper, we explore the effectiveness of overlaying earnings revision strategies on traditional fundamental value and quality factors across seven Pan Asian markets—Australia, China, Hong Kong, India, Japan, South Korea, and Taiwan—between March 31, 2006, and March 31, 2018.
Currency-hedged strategies attempt to eliminate the additional volatility that exchange rates impose on foreign assets. But this benefit comes with some trade-offs. Hedging currency risk has additional costs and can have tax implications. This paper starts with a brief review of the nature of currency risk. We use historic…
This paper by Axioma describes an innovative portfolio-construction workflow that takes its return expectations directly from the results of a stress test.
Analysts at Axioma examine the large divergences between indexes during Q3 2018. Top-line risk was down led by the fall in market risk, but other sources—many of which are the things managers tilt on and that drive active risk—actually bucked the market trend and increased.
The S&P 500® was up more than 20% in 2017 and entered the 10th year of a bull market cycle in 2018. Since bottoming in 2009 after the global financial crisis, the index has gained more than 300%. Risk mitigation might understandably be at the forefront of investors’ awareness, as worries of froth and volatility grow…
The Solvency II Directive (2009/138/EC) imposes a specific solvency capital charge on currency mismatches between insurance companies’ assets and liabilities. Most insurers choose to hedge the bulk of their foreign-currency exposures unless they hold a particularly strong view on currency valuations, but a 100% hedge will…
To help investors identify objectives-based funds and their peers, we recently augmented our Morningstar Institutional Categories with the more commonly used objectives-based fund types.
The number of equity multifactor funds has mushroomed. In this paper, we present a framework to help investors better understand these funds' approaches to portfolio construction and set realistic expectations. To bring this framework to life, we apply it to a selection of multifactor funds in a series of fund profiles.
This article evaluates the portfolio implications of using drawdowns in allocation decisions by examining several established and new drawdownbased approaches. The authors introduce a new drawdown-based measure, modified conditional expected drawdown (MCED), and demonstrate its attractive characteristics, suggest a robust…
Regulation, technology and evolving client needs demand a re-think of portfolio construction that will revolutionise the role of index strategies in portfolios.
Do market prices reflect all available information? It depends. The 2013 Nobel Prize in economic sciences, which recognized the work of Eugene Fama, Robert J. Shiller, and Lars Peter Hansen, acknowledged the efficient market hypothesis (EMH) as a good starting point for understanding asset price behavior, but also suggested…
While S&P/JPX JGB VIX absolute levels have decreased considerably since the spike at the end of July 2018, the jump this month after a surprise cut to buying operations by the Bank of Japan (BoJ) highlights how sensitive market participants are to “stealth” tapering. This time, the BoJ unexpectedly reduced ultra-long…
There is no ironclad law that rates and equities can’t sell-off at the same time. Strategic diversification with bonds is akin to an uncertain insurance policy whose price and ultimate payoff in the event of a market crash is highly dependent on the level and path of interest rates. Diversifying your diversifiers with…
