risk factors

Risk Factors As Building Blocks For Portfolio Diversification

Risk Factors As Building Blocks For Portfolio Diversification: The Chemistry Of Asset Allocation by Eugene L. Podkaminer, CFA, CFA Institute

Asset classes can be broken down into factors that explain risk, return, and correlation characteristics better than traditional approaches. Because seemingly diverse asset classes may have high correlations as a result of overlapping risk factor exposures, factor analysis can improve portfolio diversification. Creating risk factor–based portfolios is theoretically possible, but practically challenging. Nevertheless, factor-based methodologies can be used to enhance portfolio construction and management.


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