ERM-329-17: Risk Factors as building blocks for Portfolio Diversification: The Chemistry of Asset Allocation


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Reading Source: ERM-329-17 Study Note

Topics Covered in this Reading:

  • The Chemistry of Asset Allocation
  • Introduction
  • Why Look at Risk Factors?
  • The Basics of Portfolio Optimization
    • What is an Asset Class?
    • Modern Portfolio Theory and the Efficient Frontier
    • Diversification in Name Only?
  • Working with Factors
    • Factor Exposures
    • Deriving Factor Characteristics: Return, Risk and Correlation
  • Constructing Factor Portfolios
  • Challenges in Factor-Based Portfolio Construction
  • Portfolio Applications
    • De-Risking and LDI
    • Using Factors Within Manager Structure
    • Next Steps in Asset Allocation
  • Conclusion