Risk-Based and Factor Investing - 1st Edition - ISBN: 9781785480089, 9780081008119

Risk-Based and Factor Investing

1st Edition

Editors: Emmanuel Jurczenko
eBook ISBN: 9780081008119
Hardcover ISBN: 9781785480089
Imprint: ISTE Press - Elsevier
Published Date: 18th November 2015
Page Count: 486
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This book is a compilation of recent articles written by leading academics and practitioners in the area of risk-based and factor investing (RBFI).

The articles are intended to introduce readers to some of the latest, cutting edge research encountered by academics and professionals dealing with RBFI solutions. Together the authors detail both alternative non-return based portfolio construction techniques and investing style risk premia strategies.

Each chapter deals with new methods of building strategic and tactical risk-based portfolios, constructing and combining systematic factor strategies and assessing the related rules-based investment performances. This book can assist portfolio managers, asset owners, consultants, academics and students who wish to further their understanding of the science and art of risk-based and factor investing.

Key Features

  • Contains up-to-date research from the areas of RBFI
  • Features contributions from leading academics and practitioners in this field
  • Features discussions of new methods of building strategic and tactical risk-based portfolios for practitioners, academics and students


Portfolio managers, asset owners, consultants, academics, post-graduate students within the field of mathematics and investment

Table of Contents

  • Acknowledgements
  • Preface
  • 1: Advances in Portfolio Risk Control
    • Abstract
    • 1.1 Introduction
    • 1.2 The empirical example and preliminaries
    • 1.3 Maximum Sharpe ratio portfolio (MSRP)
    • 1.4 1/N or equal-weighting
    • 1.5 Minimum variance portfolio (MVP)
    • 1.6 Maximum diversification portfolio (MDP)
    • 1.7 Equal risk contribution portfolio (ERCP): full risk parity
    • 1.8 Inverse volatility portfolio (IVP): naive risk parity
    • 1.9 Volatility weighting over time
    • 1.10 Evaluation
    • 1.11 Appendix
  • 2: Smart Beta: Managing Diversification of Minimum Variance Portfolios
    • Abstract
    • 2.1 Introduction
    • 2.2 Risk-based investing and variance minimization
    • 2.3 Managing the diversification
    • 2.4 Understanding the behavior of smart beta portfolios
    • 2.5 Conclusion
    • 2.6 Appendix
  • 3: Trend-Following, Risk-Parity and the Influence of Correlations
    • Abstract
    • 3.1 Introduction
    • 3.2 Methodology
    • 3.3 Data description
    • 3.4 Performance evaluation of trend-following
    • 3.5 Risk-parity principles
    • 3.6 Performance evaluation of risk-parity trend-following
    • 3.7 Conclusion
    • 3.8 Appendix: solving for risk parity
  • 4: Diversifying Risk Parity: In Today, Out Tomorrow?
    • Abstract
    • 4.1 Managing diversification
    • 4.2 Rationalizing principal portfolios
    • 4.3 Risk-based asset allocation
    • 4.4 Conclusion
    • 4.5 Acknowledgments
  • 5: Robust Portfolio Allocation with Systematic Risk Contribution Restrictions
    • Abstract
    • 5.1 Introduction
    • 5.2 Portfolio allocation with risk contribution restrictions
    • 5.3 Portfolio allocation with systematic risk contribution restrictions
    • 5.4 Illustrations with different risk measures
    • 5.5 Application
    • 5.6 Concluding remarks
  • 6: Risk-Based Investing but What Risk(s)?
    • Abstract
    • 6.1 Introduction
    • 6.2 Expected shortfall as risk measure
    • 6.3 Broadening risk measures
    • 6.4 Empirical results
    • 6.5 Conclusion
    • 6.6 Mathematical Appendix
    • 6.7 Data Appendix
  • 7: Target Volatility
    • Abstract
    • 7.1 Introduction
    • 7.2 Better leverage and the Samuelson puzzle
    • 7.3 Target volatility and Sharpe ratio improvement
    • 7.4 Informative or uninformative leverage
    • 7.5 Target volatility and tail hedging
    • 7.6 Asymmetric leverage
    • 7.7 Target volatility across asset classes
    • 7.8 Conclusions
  • 8: Smart Beta Equity Investing Through Calm and Storm
    • Abstract
    • 8.1 Introduction
    • 8.2 A regime switching approach to market timing
    • 8.3 Sample and variable description
    • 8.4 Results
    • 8.5 Conclusion
    • 8.6 Acknowledgments
    • 8.7 Appendix
  • 9: Solving the Rebalancing Premium Puzzle
    • Abstract
    • 9.1 Introduction
    • 9.2 Rebalancing as a risk premium
    • 9.3 Probing the limits: when simulations provide more insight
    • 9.4 Beating the best asset: a path to the low-risk anomaly explanation
    • 9.5 When rebalancing pays off
    • 9.6 Conclusions
    • 9.7 Appendix
  • 10: Smart Betas: Theory and Construction
    • Abstract
    • 10.1 Introduction
    • 10.2 Signals
    • 10.3 Fundamental law of active management
    • 10.4 Factors construction
    • 10.5 Conclusions
  • 11: Low-Risk Anomaly Everywhere: Evidence from Equity Sectors
    • Abstract
    • 11.1 Introduction
    • 11.2 Low volatility or low beta?
    • 11.3 Sector-neutral low-risk investing
    • 11.4 Sector-neutral versus non-sector neutral low-risk investing
    • 11.5 Conclusions
    • 11.6 Acknowledgments
  • 12: The Low Volatility Anomaly and the Preference for Gambling
    • Abstract
    • 12.1 Introduction
    • 12.2 A brief review of the literature
    • 12.3 Lottery and volatility double sort
    • 12.4 International evidence
    • 12.5 Conclusion
    • 12.6 Appendix
  • 13: The Low Beta Anomaly and Interest Rates
    • Abstract
    • 13.1 Literature review
    • 13.2 The anomaly and interest rates
    • 13.3 Model specification
    • 13.4 Empirical analysis and results
    • 13.5 The anomaly and interest maturity mismatch
    • 13.6 Model specification
    • 13.7 Results
    • 13.8 Concluding remarks
  • 14: Factoring Profitability
    • Abstract
    • 14.1 Quality is an active investment strategy with a long and distinguished history
    • 14.2 Replicating gross profitability with style factors
    • 14.3 The four-factor Fama–French–Carhart model does not explain gross profitability
    • 14.4 The Barra USE4 model explains a substantial portion of gross profitability over the past two decades
    • 14.5 Conclusion
    • 14.6 Disclosure
  • 15: Deploying Multi-Factor Index Allocations in Institutional Portfolios
    • Abstract
    • 15.1 Introduction
    • 15.2 Implementing factors through multi-factor index allocations
    • 15.3 Selecting the right blend of factors
    • 15.4 Implementation considerations
    • 15.5 Multi-factor index allocations: examples
    • 15.6 Conclusion
  • 16: Defining the Equity Premium, a Framework
    • Abstract
    • 16.1 Introduction
    • 16.2 Defining the equity premium
    • 16.3 Risk-rewards homogeneity and the equity premium
    • 16.4 A taxonomy of smart beta and risk factors driven strategies
    • 16.5 Being practical: a core-satellite portfolio allocation
    • 16.6 Conclusion
  • 17: Designing Multi-Factor Equity Portfolios
    • Abstract
    • 17.1 Introduction
    • 17.2 Absolute return perspective
    • 17.3 Relative risk perspective
    • 17.4 Conclusion: index design and allocation decisions for multi-factor equity portfolios
  • 18: Factor Investing and Portfolio Construction Techniques
    • Abstract
    • 18.1 Introduction
    • 18.2 Risk factor investing: the new paradigm
    • 18.3 Theory meets practice
    • 18.4 Taxonomy of risk premia strategies
    • 18.5 Is risk premia allocation inherently superior to asset-class allocation?
    • 18.6 Portfolio construction techniques
    • 18.7 An alternative approach for defining diversification
    • 18.8 An alternative definition of risk
    • 18.9 Comparison of different risk-based portfolio construction techniques
    • 18.10 Conclusion
  • 19: Multi-Factor Portfolio Construction for Passively Managed Factor Portfolios
    • Abstract
    • 19.1 A short history of passively managed factor portfolios
    • 19.2 Single-factor portfolio construction
    • 19.3 Why combine multiple factors?
    • 19.4 Multi-factor portfolio construction
    • 19.5 Conclusion
    • 19.6 Appendix A: description of tilted factor portfolios
  • 20: Statistical Overfitting and Backtest Performance
    • Abstract
    • 20.1 Introduction
    • 20.2 Backtest overfitting in finance and investments
    • 20.3 Quantifying backtest overfitting effects
    • 20.4 An online demonstration of backtest overfitting
    • 20.5 Conclusion
    • 20.6 Acknowledgments
  • List of Authors
  • Index


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ISTE Press - Elsevier
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About the Editor

Emmanuel Jurczenko

Emmanuel Jurczenko is Professor of Finance and Associate Dean at Ecole Hôtelière de Lausanne in Switzerland. He has published several articles in academic journals, edited books, and serves as a referee in several international leading journals. His research focuses on risk budgeting, factor-based investing and alternative investments.

Affiliations and Expertise

Professor of Finance and Associate Dean at Ecole Hôtelière de Lausanne, Switzerland


"Investors are increasingly looking to factor investing and risk-based allocations as building blocks when constructing their portfolios. Why is this? Because the limitations of traditional asset allocation techniques and market-capitalisation-weighted benchmarks have become all too apparent in recent years, leading them to seek more efficient ways to invest. But this new approach to investment also brings with it some challenges. Everybody is talking about factor investing, but which factors should we consider, and what’s the best way to allocate between them? When we discuss risk-based allocation, which risks should we take into account? And although the theoretical foundation behind factor investing is compelling, how can we actually implement it in investors’ portfolios? This book aims to act as a bridge between academic research and market practitioners, providing investors with practical advice on how to use risk-based and factor investing as the basis of the portfolio construction process." --Fiona Frick, CEO, Unigestion

"Risk-Based and Factor Investing is a must-read for all students of quantitative asset-allocation and portfolio construction methods. Remarkably, Jurczenko manages to offer under a single cover some of the best reading from academics and practitioners leading the research and application of these investment techniques. The collection of articles offers a rare balance of theoretical rigour, practical insight and guidance that will be an excellent reference for investment professionals and researchers alike, for years to come." --Michael Sabbatini, Partner, Capital International

"Risk based and factor investing (RBFI) techniques are increasingly used by investors to allocate capital in their investment portfolios. This book contains a collection of papers that address some of the theoretical and practical aspects associated with making such allocations. The range of topics and the depth of analysis in the articles make this collection invaluable to practitioners looking to implement such strategies as well as academics seeking to gain an understanding of recent developments in portfolio management. Regardless of whether you are new to this field or an experienced professional you will undoubtedly gain valuable insight into the world of RBFI from this book." --Harindra de  Silva, President, Analytic Investors

"The twenty chapters in this book are written by top-quality academics and practitioners who have been at the forefront of recent advances in investment management. These chapters cover a broad range of topics that are at the cutting edge of investment management ranging from portfolio risk control, smart beta, risk parity, robust portfolio allocation, and the rebalancing premium.  The book also discusses various anomalies such as the low-risk and low-beta anomalies and includes a modern discussion of the equity risk premium, multifactor portfolio construction, and statistical over fitting and backtesting. This comprehensive guide will be an invaluable resource to portfolio and asset managers as well as academics who wish to better understand the latest advances in the practice of investment management. The book offers a rich collection of theoretical results, empirical findings, and deep insights about investment practice." --Raman Uppal, Professor of Finance, Edhec Business School