Portfolios - EDHEC-Risk

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Impact of Relative <strong>Risk</strong> Control Panel A: Relative Drawdown of Diversified Strategy with and without relative risk control 0% Panel B: Rolling Oneyear Tracking Error of Diversified Strategy with and without relative risk control 9% 8% ‐5% ‐10% ‐15% ‐20% 7% 6% 5% 4% 3% 2% 1% ‐25% 0% Diversified ifi (with RR control) Diversified ifi (without t RR control) Diversified ifi (with RR control) Diversified ifi (without t RR control) The plot shows relative drawdown of diversified portfolios (50% Minimum Volatility + 50% Maximum Sharpe Ratio) with and without relative risk control as compared to the S&P 500 index. Panel B ‐ The plot shows 1‐year trailing tracking error for Diversified (50% Minimum Volatility + 50% Maximum Sharpe Ratio) portfolios with and without relative risk control as compared to the S&P 500 index. The period of analysis ranges from 2nd January 1959 to 31st December 2010. 32
Improved Benchmarks in Investors’ <strong>Portfolios</strong> • CW indices are macro-consistent, relatively transparent, systematic and come with low-cost, and will arguably remain the ultimate references; on the other hand, they provide severely inefficient risk/reward properties due to their high concentration. • Active managers come with less transparency and higher h costs but have difficulties in persistently outperforming even inefficient CW indices due to a focus on stock selection. • More efficient equity benchmarks can be designed, which may be used as substitutes for active managers in attempts to add value with respect to the CW index, while allowing for an explicit control of downside relative risk through diversification and hedging. 33
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 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

Portfolios - EDHEC-Risk

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