Asset Class Diversification versus Risk Factor Diversification

A portfolio mix which combines a seemingly diverse set of asset classes may not amply mitigate market volatility. Understanding the underlying risk factors, which can cross-over many asset classes,  can help investors create a more efficient, consistent investment portfolio. 

What this chart shows

Seemingly diversified portfolios may contain unintentional risk. Unexpected market outcomes can occasionally overwhelm asset class fundamentals, causing risk factors to cross into typically uncorrelated asset classes. 

What it means for investors

Investment portfolios need to adopt an asset allocation approach that looks beyond asset class labels and instead focuses on risk factors –  the underlying risk exposures that ultimately drive investment returns. Once identified, portfolios should utilize various investment strategies which source returns from the dynamic nature of risk factors. In order to efficiently and consistently benefit from key risk factors, portfolios must engage in strategies which have directional flexibility – that is, the ability to go long or short securities. 

Equity risk is not limited to equities 

Asset v Risk 2


How equity risk manifests; Asset Class Returns 1 June, 2008 - 31 December, 2008

How equity risk manifests

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