Diversification in Multi-Factor Portfolios

  • The debate rages on over the application of valuation in factor-timing methods. Regardless, diversification remains a prudent recommendation.
  • How to diversify multi-factor portfolios, however, remains up for debate.
  • The ActiveBeta team at Goldman Sachs finds new evidence that composite diversification approaches can offer a higher information ratio than integrated approaches due to interaction effects at low-to-moderate factor concentration levels.
  • At high levels, they find that integrated approaches have higher information ratios due to high levels of idiosyncratic risks in composite approaches.
  • We return to old research and explore empirical evidence in FTSE Russell’s tilt-tilt approach to building an integrated multi-factor portfolio to determine if this multi-factor approach does deliver greater factor efficiency than a comparable composite approach.

Source: Diversification in Multi-Factor Portfolios | Flirting with Models

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.