Abstract
The recent surge of interest in so-called smart beta strategies originates from the apparent shortcomings of both traditional benchmarks and active management. Yet not all investors want to follow passive indexing, no matter how smart. Recent literature has tried to reconcile the need for integrating active views in a given benchmark with the risk discipline of the smart beta approach. In particular, Medvedev (2015) has proposed a procedure of risk optimization based on qualitative views or rankings and a prior portfolio. The current article updates that procedure by making it simpler, more robust and thus better suited for real life applications. Our aim is to present an easily implemented rule that, given a benchmark and a set of views, yields a portfolio that dominates the benchmark both in risk and return. We provide an intuitive interpretation of this algorithm as a hedging procedure where risk budgets allocated to each active view are determined on the basis of their hedging capacity. We demonstrate the working of this algorithm using the Dow Jones Large Caps equity index as an illustration.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
