R2 and the Benefits of Multiple-Fund Portfolios

Posted: 17 Jun 2013 Last revised: 8 Aug 2014

See all articles by Dale L. Domian

Dale L. Domian

York University - School of Administrative Studies

David Nanigian

San Diego State University - Fowler College of Business - Finance Department

Date Written: July 17, 2013

Abstract

Recent research shows superior performance of equity mutual funds which differ the most from their benchmarks. However, existing studies have not examined important questions about risk, such as the impact of holding a portfolio of low R2 funds on the reduction in portfolio risk achieved through diversifying across funds. Our study provides some answers. Using a variety of risk metrics, we evaluate the benefits of diversification among both monthly and annually reconstituted portfolios, where funds are sorted into portfolios based on their quintile rank of R2. We find that the benefits of diversification are most pronounced within a portfolio of low R2 funds, and that the benefits are increasing in the length of the reconstitution period.

Keywords: portfolio risk management, R-Squared, diversification, volatility, shortfall risk, Value at Risk, simulations, investment advisors, mutual fund performance, closet indexing

JEL Classification: G11, G17, G20, G23, C15

Suggested Citation

Domian, Dale L. and Nanigian, David, R2 and the Benefits of Multiple-Fund Portfolios (July 17, 2013). Journal of Investing, Vol 23, No. 3 (Fall 2014), Available at SSRN: https://ssrn.com/abstract=2280145 or http://dx.doi.org/10.2139/ssrn.2280145

Dale L. Domian

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

David Nanigian (Contact Author)

San Diego State University - Fowler College of Business - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States
213-545-1036 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
850
PlumX Metrics