PT  - JOURNAL ARTICLE
AU  - Raul Leote de Carvalho
AU  - Xiao Lu
AU  - Pierre Moulin
TI  - Demystifying Equity Risk–Based Strategies:<br/>
               <em>A Simple Alpha plus Beta Description</em>
AID  - 10.3905/jpm.2012.38.3.056
DP  - 2012 Apr 30
TA  - The Journal of Portfolio Management
PG  - 56--70
VI  - 38
IP  - 3
4099  - https://pm-research.com/content/38/3/56.short
4100  - https://pm-research.com/content/38/3/56.full
AB  - In this article, de Carvalho, Lu, and Moulin consider five risk-based strategies: equally weighted, equal-risk budget, equal-risk contribution, minimum variance, and maximum diversification. All five strategies can be well described by exposure to the market-cap index and to four simple factors: low beta, small cap, low residual volatility, and value. This finding, in their view, is a major contribution to the understanding of such strategies and provides a simple framework to compare them. All except the equal-weighted strategy are defensive and have lower volatility than the market-cap index. Equal-weighted is exposed to small-cap stocks. Equal-risk budget and equal-risk contribution are exposed to small-cap and to low-beta stocks. These three have a high correlation of excess returns, and their portfolios largely overlap. Their portfolios invest in all stocks available and have both a low turnover and low tracking error relative to the market-cap index. The minimum variance and maximum diversification strategies primarily have exposure to low-beta stocks. These two strategies are the most defensive, invest in much the same stocks, and have high tracking error and turnover.TOPICS: Volatility measures, VAR and use of alternative risk measures of trading risk, analysis of individual factors/risk premia