Risk-Factor Diversification and Portfolio Selection

33 Pages Posted: 28 Aug 2012

See all articles by Scott N. Pappas

Scott N. Pappas

Griffith University - Griffith Business School

Robert J. Bianchi

Griffith University

Michael E. Drew

Griffith University

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

Date Written: August 27, 2012

Abstract

Traditionally, investment portfolios have been constructed with a focus on what asset classes to invest in and how much to invest in each. Recent research, however, has shown that focusing on risk-factor allocations, rather than asset class allocations, can result in better risk-adjusted portfolio performance. The existing literature has focused on simple allocation strategies such as equal-weighted and equal-risk-weighted portfolios. In addition to these simple allocation techniques, this paper compares the performance using mean-variance analysis, and presents evidence that the outperformance of risk-factor diversification may not be as conclusive as has been previously presented in the literature. While confirming some of the prior findings on risk-factor diversification, the research shows that previous findings may be subject to strong caveats. Specifically, the evidence suggests that the selection of risk-factors, portfolio selection techniques and time-period have a large impact on performance outcomes.

Suggested Citation

Pappas, Scott N. and Bianchi, Robert J. and Drew, Michael E. and Gupta, Rakesh, Risk-Factor Diversification and Portfolio Selection (August 27, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2136827 or http://dx.doi.org/10.2139/ssrn.2136827

Scott N. Pappas (Contact Author)

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

Robert J. Bianchi

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Michael E. Drew

Griffith University ( email )

Brisbane, Queensland 4111
Australia

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

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