Proverbial Baskets Are Uncorrelated Risk Factors! A Factor-Based Framework for Measuring and Managing Diversification in Multi-Asset Investment Solutions

Abstract

Multi-asset investment solutions have become increasingly popular among sophisticated institutional investors focusing on efficient harvesting of risk premia across and within asset classes. One key challenge in the construction of diversified multi-asset portfolio strategies is that even a seemingly well-balanced allocation to many asset classes can eventually translate into a portfolio with a very concentrated set of underlying risk exposures. The authors suggest using a factor-based framework to more effectively measure and manage diversification in multi-asset portfolios.

TOPICS: Analysis of individual factors/risk premia, portfolio construction