RESEARCH: ALLOCATION MODELS

VOLATILITY, DISPERSION & CORRELATION – FRIENDS OR FOES?

  • Higher volatility & dispersion imply higher stock market risks
  • The relationship between correlation and risk is not linear
  • However, these market technicals do not behave consistently across time

MARKET TIMING WITH MULTIPLES, MOMENTUM & VOLATILITY

  • Equity multiples have been elevated in recent years
  • Using valuation multiples for allocation decisions is a challenging strategy
  • Momentum and volatility-based strategies are more attractive

WHITE PAPER: FACTOR ALLOCATION MODELS

  • Factor timing and factor risk management are related concepts, but have different objectives
  • Factors have unique characteristics that require a tailored risk management approach
  • A multi-dimensional factor risk management model shows consistent increases in risk-return ratios and decreases in maximum drawdowns across markets

FACTOR ALLOCATION 101: EQUAL VS VOLATILITY-WEIGHTED

  • Equal-weight and volatility-weighted allocations are two common factor allocation frameworks
  • Risk-return ratios are not higher with volatility-weighted allocations
  • Different reasons can explain the superiority of equal-weight allocations

FACTORS & VOLATILITY-BASED RISK MANAGEMENT 

  • A common approach to factor allocation is to scale exposure by factor volatility
  • This approach improves the risk-return ratios of Momentum, but lowers them for Value and Size
  • Factors have different underlying drivers, which require different risk management systems

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