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).
This tome (authored by CFA Institute Research Foundation) examines the differences between classical finance and behavioral finance and how they can compliment each other. Whichever story investors subscribe to, the market is very complex. It contains far more securities than can be practical to analyze individually. This…
Climate change presents a potential systemic risk to the financial system. This 60-page guide by the Institutional Investors Group on Climate Change aims to serve as a ‘how-to guide’ for institutional investors who are beginning to construct and conduct scenario analysis.
Investors are increasingly showing interest in risk premia strategies across asset classes. Carry is one of the most studied premia. To successfully execute a risk premia strategy, it is important to have a detailed understanding of how individual premia returns are affected by macroeconomic conditions.
What are the signs of equity market stress? In this paper, we offer a collection of reliable indicators to help identify the degree of market instability. These indicators provide investors with insight to capital markets that complement other conventional risk metrics (e.g., valuations, sentiment, economic).
Volatility is usually seen as something bad, a foe to long-term performance; but the insights it provides may actually make it more of a friend that can be used to help strengthen portfolio resilience.
Volatility is usually seen as something bad, a foe to long-term performance; but the insights it provides may actually make it more of a friend that can be used to help strengthen portfolio resilience.
Factor index construction is currently a widely discussed topic among institutional investors and asset managers, particularly whether the construction of multi-factor indexes should be top-down or bottom-up. In this paper, FTSE Russell compares the exposure and diversification outcomes of multi-factor portfolios that use a…
What are the signs of equity market stress? In this paper, we offer a collection of reliable indicators to help identify the degree of market instability. These indicators provide investors with insight to capital markets that complement other conventional risk metrics (e.g., valuations, sentiment, economic).
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…
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…
Institutional investor portfolios typically hold a significant allocation of unhedged foreign currencies. But currencies have no specific role in institutional portfolios. Currency has no long-term expected return because it is not an economic asset; it is simply a source of risk. Currency risk has long bedeviled investors,…
This paper is devoted to the question of optimal portfolio construction for equity factor investing. It demonstrates how to make sure that a given equity portfolio has the targeted factor exposures, even before imposing any constraints. The authors show that such portfolios can be derived from mean-variance optimization…
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…
This paper by Axioma describes an innovative portfolio-construction workflow that takes its return expectations directly from the results of a stress test.
Year-end 2018 was the antithesis of the close-out in 2017. While investors reveled in large equity gains and low volatility the year before, 2018 brought the misery of steep losses and high levels of volatility. Markets were choppy throughout the year and especially in the fourth quarter, with stocks wavering between gains…
This authors of this report discuss risk and return implications of incorporating Environmental, Social and Governance (ESG) considerations in an investment strategy. They focus on the risk side in particular and argue that ESG exposures may be informative about the risks of individual firms. They find clear support for this…
The impact of currency hedging for global portfolios has been debated extensively. In this paper we take an approach from a risk viewpoint (i.e., can hedging lead to lower volatility or be some kind of risk control?) as this is central for outcome-oriented asset allocators.
The scatter plot provides a look at 10-year expectations for an extensive list of over 130 asset classes and strategies. This view provides context on the risk/return attributes across the investment spectrum. Although most investors will not directly invest in many of these assets, instead opting for bundles of these…
As the effects of climate change become more severe, catastrophe risk modelling is more relevant than ever. Few sectors of the economy play a role as intense in catastrophe recovery as insurance; therefore, the industry should strive to continually strengthen the predictive power of its catastrophe modelling capabilities.…
2019 will be a decisive year for three of the world’s biggest central banks. After having accumulated more than €2.5tn of assets since the beginning of 2015, the European Central Bank (ECB) is finally set to terminate its asset-purchasing program from January. The Bank of England (BoE) already started to tighten its monetary…
