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 … Continue reading Diversification in Multi-Factor Portfolios