Demystifying Equity Risk-Based Strategies: A Simple Alpha Plus Beta Description

The Journal of Portfolio Management, vol. 38, no. 3, Spring 2012.

Posted: 25 Oct 2011 Last revised: 3 Feb 2015

See all articles by Raul Leote de Carvalho

Raul Leote de Carvalho

BNP Paribas Asset Management

Lu Xiao

BNP Paribas Investment Partners

Pierre Moulin

BNP Paribas Investment Partners

Date Written: September 13, 2011

Abstract

We considered five risk-based strategies: equally-weighted, equal-risk budget, equal-risk contribution, minimum variance and maximum diversification. All five can be well described by exposure to the market-cap index and to four simple factors: low-beta, small-cap, low-residual volatility and value. This is, in our view, a major contribution to the understanding of such strategies and provides a simple framework to compare them. All except equally-weighted are defensive with lower volatility than the market-cap index. Equally-weighted is exposed to small-cap stocks. Equal-risk budget and equal-risk contribution are exposed to small-cap and to low-beta stocks. These three have a high correlation of excess returns and their portfolio largely overlap. They invest in all stocks available and have both a low turnover and low tracking error relative to market-cap index. Minimum variance and maximum diversification are essentially exposed to low-beta stocks. They are the most defensive, invest in much the same stocks and have high tracking error and turnover.

Keywords: low volatility, risk-based, minimum variance, equally-weighted, equal-risk budget, equal-risk contribution, maximum diversification, portfolio construction

JEL Classification: G11

Suggested Citation

Carvalho, Raul Leote de and Xiao, Lu and Moulin, Pierre, Demystifying Equity Risk-Based Strategies: A Simple Alpha Plus Beta Description (September 13, 2011). The Journal of Portfolio Management, vol. 38, no. 3, Spring 2012. . Available at SSRN: https://ssrn.com/abstract=1949003

Raul Leote de Carvalho (Contact Author)

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France
0033158972183 (Phone)

Lu Xiao

BNP Paribas Investment Partners ( email )

14 rue bergère
Paris, 75009
France

Pierre Moulin

BNP Paribas Investment Partners ( email )

Paris
France

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