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The Journal of Index Investing

The Journal of Index Investing

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Article

Less Volatile Portfolios: Strength through Simplicity

Joe Staines, Steven (Yegang) Wu, Wei (Victor) Li and Yazann Romahi
The Journal of Index Investing Fall 2017, 8 (2) 89-94; DOI: https://doi.org/10.3905/jii.2017.8.2.089
Joe Staines
is a portfolio manager in Quantitative Beta Strategies at J.P. Morgan Asset Management in New York, NY. joe.staines@jpmorgan.com
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Steven (Yegang) Wu
is a portfolio manager in Quantitative Beta Strategies at J.P. Morgan Asset Management in New York, NY. steven.wu@jpmorgan.com
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Wei (Victor) Li
is the head of research in Quantitative Beta Strategies at J.P. Morgan Asset Management in London, U.K. victor.li@jpmorgan.com
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Yazann Romahi
is the chief investment officer in Quantitative Beta Strategies at J.P. Morgan Asset Management in London, U.K. yazann.romahi@jpmorgan.com
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Abstract

One prominent trend in equity indexing in recent years has been indexes that target a lower volatility than a capitalization-weighted benchmark. To read the ground rule document of indexes using optimization procedures, one would think that it requires fine detailed predictions of return distributions and finely tuned constraints. In truth, the same outcome can be achieved with a far simpler set of rules, as the authors show in this article. The value of simplifying portfolio construction is twofold: robustness and stability. Robustness means lower sensitivity of the portfolio to input assumptions, decreasing the likelihood of changes in performance out of sample. Stability of solutions through time means that the portfolio can be allowed to run with fewer constraints, ensuring that the desired outcome (in this case lower volatility) can still be achieved without undue turnover in the portfolio. The authors demonstrate a simple method that can be used to build more robust volatility-lowering portfolios.

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The Journal of Index Investing: 8 (2)
The Journal of Index Investing
Vol. 8, Issue 2
Fall 2017
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Less Volatile Portfolios: Strength through Simplicity
Joe Staines, Steven (Yegang) Wu, Wei (Victor) Li, Yazann Romahi
The Journal of Index Investing Aug 2017, 8 (2) 89-94; DOI: 10.3905/jii.2017.8.2.089

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Less Volatile Portfolios: Strength through Simplicity
Joe Staines, Steven (Yegang) Wu, Wei (Victor) Li, Yazann Romahi
The Journal of Index Investing Aug 2017, 8 (2) 89-94; DOI: 10.3905/jii.2017.8.2.089
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  • Article
    • Abstract
    • THE MINIMUM-VOLATILITY MISNOMER
    • THE THIRD WAY: SUBPORTFOLIO OPTIMIZATION
    • A WIDER WORLD OF ROBUST INVESTING
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  • Smart Beta Multifactor Construction Methodology: Mixing versus Integrating
  • Stacking Blocks or Mixing Paints? Modular and Integrated Approaches to Factor Portfolio Construction
  • The Curious Case of the Mid-Cap Premium
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