Abstract
As smart beta investments in institutional portfolios have grown—along with the additional complexity introduced by multifactor approaches—there is an emerging need for guidance on how to allocate across the ever-increasing array of smart beta products. Smart beta and multifactor investments are exposed to a common subset of elementary smart betas, combined with more idiosyncratic residual exposures. Accounting for the incidental exposures to common factors as well as the idiosyncratic exposures is necessary in designing a well-diversified and efficient portfolio. Accordingly, this article develops a standard framework for investors to blend single-factor and multifactor smart beta within a total portfolio context. A case study demonstrates how the methodology can be applied to attain better portfolios.
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