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The Journal of Portfolio Management

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Primary Article

Concentrating on Concentration

Ross M. Curds
The Journal of Portfolio Management Summer 2004, 30 (4) 150-159; DOI: https://doi.org/10.3905/jpm.2004.150
Ross M. Curds
is director of European equity models at Barra Inc. in London.
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  • For correspondence: ross.curds@barra.com
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Abstract

Factor models seek to reduce the impact of spurious in-sample correlations on the estimation of a covariance matrix of security returns. Among U.S. equities, market value is concentrated in a small number of assets both across the market and within industry sectors. Over 50% of market value, for example, is captured by 1% of assets. This can unwittingly compromise factor model design and result in a significant misprediction of portfolio risk. Correlations may be induced between the specific returns of high-cap securities as an artefact of regression procedures. There are solutions to avoid such mistakes and thus improve the efficacy of risk predictions.

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The Journal of Portfolio Management
Vol. 30, Issue 4
Summer 2004
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Concentrating on Concentration
Ross M. Curds
The Journal of Portfolio Management Jul 2004, 30 (4) 150-159; DOI: 10.3905/jpm.2004.150

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Concentrating on Concentration
Ross M. Curds
The Journal of Portfolio Management Jul 2004, 30 (4) 150-159; DOI: 10.3905/jpm.2004.150
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