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Article

Dimensions of Diversification

Joe Staines, Wei (Victor) Li and Yazann Romahi
The Journal of Index Investing Fall 2016, 7 (2) 119-127; DOI: https://doi.org/10.3905/jii.2016.7.2.119
Joe Staines
is a quantitative analyst for multi-asset solutions at J.P. Morgan Asset Management in New York, NY.
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  • For correspondence: joe.staines@jpmorgan.com
Wei (Victor) Li
is a quantitative portfolio manager for multi-asset solutions at J.P. Morgan Asset Management in London, UK.
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  • For correspondence: victor.li@jpmorgan.com
Yazann Romahi
is the global head of quantitative strategies and research for multi-asset solutions at J.P. Morgan Asset Management in London, UK.
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  • For correspondence: yazann.romahi@jpmorgan.com
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Abstract

Within the investment industry, diversification now refers to not only the division of capital among a large number of securities but also the avoidance of risk concentration in any of a number of dimensions. Market-capitalization-weighted indexes often fail this requirement. The authors thus argue that although capitalization weighting makes a suitable benchmark, smart beta can provide a way to build indexes more suitable for investment. The authors present a methodology to measure and hence maximize diversification simultaneously across multiple dimensions. They show the practical value of this measure by using it to backtest equity portfolios. This provides an example of how the properties of assets, rather than historical returns, can be used to systematically construct well-diversified portfolios.

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The Journal of Index Investing: 7 (2)
The Journal of Index Investing
Vol. 7, Issue 2
Fall 2016
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Dimensions of Diversification
Joe Staines, Wei (Victor) Li, Yazann Romahi
The Journal of Index Investing Aug 2016, 7 (2) 119-127; DOI: 10.3905/jii.2016.7.2.119

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Dimensions of Diversification
Joe Staines, Wei (Victor) Li, Yazann Romahi
The Journal of Index Investing Aug 2016, 7 (2) 119-127; DOI: 10.3905/jii.2016.7.2.119
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  • Article
    • Abstract
    • DIVERSIFICATION MEASURES
    • DIVERSIFIED PORTFOLIO CONSTRUCTION
    • WHICH DIMENSIONS MATTER?
    • MEASURING DIVERSIFICATION IN A SINGLE DIMENSION AND IN AGGREGATE
    • DIMENSIONS OF DIVERSIFICATION IN PRACTICE: EQUITY PORTFOLIOS
    • CONCLUSIONS
    • REFERENCES
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  • PDF (Subscribers Only)

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