Using “Pure Risk Premia” For Portfolio Construction

Portfolio construction has re-emerged as an important topic of research in the last few years, as traditional diversification techniques don’t always work when there are strong correlations within the market. The tactic of organizing a portfolio around distinct risk premia provides a possible alternative to sector or geographic diversification, but eliminating unwanted correlations isn’t always an easy task. Standard approach to gain risk premia “The standard approach to gaining risk premia exposure is through ranking stocks based on quantifiable characteristics and then buying equal amounts of the top quintile whilst shorting the bottom. This roughly equates to zero market exposure…