Portfolios - EDHEC-Risk

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Fundamental Weighting for Representativity? • Rather than using the market cap, fundamental indices use firm attributes such as book value, dividends, sales or cash flows as measures of size. • These indices aim at better representing the economy. Arnott (2007): “The Fundamental Index weights companies in accordance to their footprint in the broad economy […] you wind up with a portfolio that mirrors the economy”. • Whether or not fundamentally weighted indices better represent the economy is actually an open question, if only because representativity is not a concept that is linked to clear measures. • Conditions under which fundamental benchmarks would be optimal are unclear. 10
Efficiency is Related to Diversification • In any case, it is not clear why investors would care about their portfolios representing the economy; from the investor’s perspective, the focus should be on efficiency: obtaining fair rewards for given risk budgets. • Efficiency is intimately related to diversification: it is by constructing ti well-diversified ifi d portfolios thatt one can achieve a fair reward for a given risk exposure. • CW portfolios appear to be rather inefficient and poorly diversified portfolios, and several approaches have been developed so as to improve diversification compared to CW. • Some benchmark construction approaches simply avoid this concentration without aiming for “optimality”; other approaches are grounded d in portfolio theory. 11
Page 2 and 3: EDHEC-Risk Days 2012 London, March
Page 4 and 5: Managing Investments t in Alternati
Page 6 and 7: • Alternatives to Cap-Weighted In
Page 8 and 9: Indices versus Benchmarks • The w
Page 12 and 13: Scientific Approaches: Towards the
Page 14 and 15: Implementing the Diversifiers • E
Page 16 and 17: Giving Up Smartly - MSR • How to
Page 18 and 19: Ad-Hoc Approaches: Maximum Diversif
Page 20 and 21: Selection Risk - Relative Returns
Page 22 and 23: Diversifying the Diversifiers - Lon
Page 24 and 25: Tracking Error Across Market Condit
Page 26 and 27: • Alternatives to Cap-Weighted In
Page 28 and 29: Tracking Error Constraints • If w
Page 30 and 31: What Separation Theorems Say and Do
Page 32 and 33: Impact of Relative Risk Control Pan

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