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Article

Risk-Based Asset Allocation: A New Answer to an
Old Question?

Wai Lee
The Journal of Portfolio Management Summer 2011, 37 (4) 11-28; DOI: https://doi.org/10.3905/jpm.2011.37.4.011
Wai Lee
is the director of research and CIO of the Quantitative Investment Group at Neuberger Berman in New York, NY.
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  • For correspondence: wai.lee@nb.com
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Abstract

In recent years, we have witnessed an alarmingly large and growing amount of literature on portfolio construction approaches focused on risks and diversification rather than on estimating expected returns. Numerous simulations applied to different universes have been documented in support of these approaches based on their apparent outperformance versus passive market capitalization–weighted or static fixed-weight portfolios. Many studies attribute the better performance of these risk-based asset allocation approaches to superior diversification. Given the absence of clearly defined investment objective functions behind these approaches as well as the metrics used by these studies to evaluate ex post performance, Lee puts these approaches into the same context of mean-variance efficiency in an attempt to understand their theoretical underpinnings. In doing so, he hopes to shed some light on what these approaches attempt to achieve and on the characteristics of the investment universe, if indeed these approaches are meant to approximate mean-variance efficiency. Rather than adding to the already large collection of simulation results, Lee uses some simple examples to compare and contrast the portfolio and risk characteristics of these approaches. He also reiterates that any portfolio which deviates from the market capitalization–weighted portfolio is an active portfolio. He concludes that there is no theory to predict, ex ante, that any of these risk-based approaches should outperform.

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The Journal of Portfolio Management: 37 (4)
The Journal of Portfolio Management
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Summer 2011
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Risk-Based Asset Allocation: A New Answer to an
Old Question?
Wai Lee
The Journal of Portfolio Management Jul 2011, 37 (4) 11-28; DOI: 10.3905/jpm.2011.37.4.011

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Risk-Based Asset Allocation: A New Answer to an
Old Question?
Wai Lee
The Journal of Portfolio Management Jul 2011, 37 (4) 11-28; DOI: 10.3905/jpm.2011.37.4.011
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  • Article
    • Abstract
    • MEAN-VARIANCE EFFICIENCY
    • RISK-BASED PORTFOLIOS
    • RETURN DUE TO DIVERSIFICATION
    • IMPLEMENTATION: U.S. 10-SECTOR PORTFOLIO EXAMPLE
    • MARKET EQUILIBRIUM, ACTIVE MANAGEMENT, AND THE EFFICIENCY OF RISK-BASED PORTFOLIOS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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