A unified framework for risk-based investing

Carolyn Moclair

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The authors offer a unifying analytical framework of risk-based portfolio strategies.
The importance of low-beta and Low-risk factors for popular international equity risk-based portfolios is confirmed.
Derivation of simple and fast algorithms to solve large scale risk-based allocation programs.

Abstract

ABSTRACT

Risk-based portfolio strategies, such as minimum variance, maximum diversification, equal weight and risk parity, to name the most famous, have become increasingly popular in the investment industry. This paper aims to help investors better understand the commonalities and differences between these strategies. We offer a general unifying analytical framework, allowing the discussion of key distinctive features such as capital concentration, market beta, volatility, sensitivity to risk parameters, preference for low-volatility assets, turnover or tracking error, while not being dependent on a specific sample. We confirm the validity of these theoretical results by an empirical investigation of a large sample of international developed equity markets over the period 2002-12.

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