Measuring Portfolio Diversification Based on Optimized Uncorrelated Factors

Agnostic risk parity: taming known and unknown unknowns

“…This is the path followed in, e.g. [17], where the further notion of "Minimum Torsion Bets" was introduced.…”

Maximum diversification strategies along commodity risk factors

“…While the principal portfolios are designed to capture most of the assets' variations, they are often perceived as being ad hoc statistical factors that lack an economic interpretation and are rather unstable over time. Addressing these objections, Meucci et al () suggest resorting to a factor model that can be orthogonalised in a way that ensures a minimum tracking error to the original factors. The authors start from a ‐factor model to explain asset returns and propose a methodology to change the standard representation of portfolio returns , into a representation in terms of uncorrelated factors , i.e., where b and denote the loadings of the portfolio returns with respect to the factor model F and , respectively.…”

“…To alleviate the above issues, we build on Meucci, Santangelo, and Deguest (2015) to come up with a more meaningful set of orthogonal factors. In particular, we consider an orthogonalised version of well-known commodity risk factors.…”

On entropy and portfolio diversification

“…Common measures are entropy-based (expressed in terms of asset volatility, asset risk contribution and principal components; Meucci, 2009), the diversification ratio (Choueifaty and Coignard, 2008) and the metrics mentioned in the previous category augmented by a risk contribution (the Herfindahl index, Lorentz curve and the Gini coefficient). Meucci et al (2014) introduced the minimum-torsion bet as a generalisation of the 'marginal contribution to risk' in traditional risk-parity portfolios.…”