Risk-Based Asset Allocation: A New Answer to anOld Question?

Maximizing excess return per unit variance: A novel investment management objective

“…One particular feature of the Sharpe ratio is its lack of sensitivity the leverage while an important downside is that the Sharpe ratio is horizon-dependent. 9 At the same time, the risk premium or the excess return per unit variance, is sensitive to leverage but independent of the investment management horizon. This downside limits the applicability of this investment objective to all-equity portfolios only.…”

Global Equity Country Allocation: An Application of Factor Investing

“…In particular, we created factor portfolios using-in addition to capitalization weights-equal (EW), inverse variance (IV), minimum variance (MinVar), and maximum diversification portfolio (MDP) weights. As discussed in Lee (2011) andHallerbach (2015), among others, these portfolio construction methodologies-used by purveyors of smart beta strategies-are equivalent to mean-variance-optimal portfolios under very specific assumptions about expected returns, variances, and correlations. Reducing the number of input estimates reduces estimation risk but creates information loss and "suboptimal" portfolios as compared with mean-variance-optimal portfolios free of estimation risk (optimality risk).…”

“…Desrosiers, L'Her, and Plante (2004) examined the performance of relative value and relative strength (momentum) global investment strategies based on country indexes in the 18 largest stock markets. Leclerc, L'Her, Mouakhar, and Savaria (2013) used US sector indexes to create alternative equity portfolios that had better performance statistics than the cap-weighted equity benchmark over 1964-2011. Angelidis and Tessaromatis (2014 created cap-weighted factor portfolios on the basis of developed-country indexes and showed the superiority of regime-based portfolio construction methodologies.…”

Filtering the piotroski portfolio: the roles of economic sector, small cap, and technical momentum

“…A portfolio should contain stocks whose covariance in stock price is negative (J. K. Lee, Trippi, Chu, & Kim, 1990). One naive way to get this covariance is to assume that different economic sectors will perform differently (Cavaglia, Brightman, & Aked, 2000;Hauser & Vermeersch, 2002), although studies show the rubric is a weak one (Hauser & Vermeersch, 2002; W. Lee, 2011). One of the hypotheses of this paper is that taking a subset of the Piotroski Portfolio based on diversification by economic sector will produce a return comparable to that of the entire set by getting appropriate diversification.…”