Risk Without Return
Journal of Investment Strategies, Volume 2, No. 2, Spring 2013
9 Pages Posted: 24 Aug 2013 Last revised: 3 Sep 2013
Date Written: September 2, 2013
Risk-only investment strategies have been growing in popularity as traditional investment strategies have fallen short of return targets over the last decade. However, risk-based investors should be aware of four things. First, theoretical considerations and empirical studies show that apparently distinct risk-based investment strategies are manifestations of a single effect. Second, turnover and associated transaction costs can be a substantial drag on return. Third, capital diversification benefits may be reduced. Fourth, there is an apparent connection between performance and risk diversification. To analyze risk diversification benefits in a consistent way, we introduce the Risk Diversification index (RDI) which measures risk concentrations and complements the Herfindahl-Hirschman index (HHI) for capital concentrations.
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