Portfolios - EDHEC-Risk

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Ad-Hoc Approaches: Maximum Diversification • Statistical de-concentration: – Define a diversification index and try and maximize it. – Maximum Diversification aims at generating portfolios with the highest possible diversification index (Choueifaty and Coignard (2008)): ⎛ n ⎞ ⎜ ⎟ ⎜∑ wiσ i ⎟ DI = Max⎜ i= 1 ⎟ w ⎜ n ⎟ ⎟ ⎜ ⎜ ∑ w i w jσ ij ⎟ ⎝ i, j= 1 ⎠ – MD is optimal (e.g., MSR) if all Sharpe ratios are identical. The weighted average risk (in the numerator) will be high compared to portfolio risk (in the denominator) and thus DI will be high if the portfolio weights exploit well the correlations. 18
• Alternatives to Cap-Weighted Indices • Diversifying the Diversifiers • Tracking the Tracking Error 19
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 10 and 11: Fundamental Weighting for Represent
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 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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