RT Journal Article
SR Electronic
T1 Risk Reduction
JF Special Issues
FD Institutional Investor Journals
SP 167
OP 175
VO 2008
IS 1
A1 Matthew J. Atwood
YR 2008
UL https://pm-research.com/content/2008/1/167.abstract
AB Traditional active portfolio management theory as applied to both long-only and 1X0/X0 strategies has focused primarily on outperformance of return relative to a benchmark return. This misses an important opportunity to add value by reducing risk relative to that benchmark as well. The article shows that a simple (long-only) low-beta active investment strategy decreases volatility relative to a passive equity benchmark without decreasing returns. Moreover, relaxing the long-only constraint to implement a 1X0/X0 variant of this same strategy reduces risk further still, once again without sacrificing returns. This leads to a superior Sharpe ratio compared to a passive equity benchmark and offers even more potential to reduce portfolio-level risk within the context of a typical institutional investor's overall asset allocation. Finally, the author discusses practical considerations related to the inapplicability of traditional active risk metrics to a volatility-reducing portfolio of this kind.