The Triumph of Mediocrity: A Case Study of Naive Beta

J. Portfolio Mgmt. 2015
  • smart beta
  • portfolio management
  • journal of portfolio management
request a copy

Published in The Journal of Portfolio Management, Summer 2015.

Executive summary

"Smart beta" splits into factor-based products and diversification-based naive betas built on equality assumptions: equal weight, minimum variance, maximum diversification, and risk parity. Factor smart beta re-packages decades-old quant ideas at index fees; naive betas make no bold forecast and simply spread risk evenly across stocks, sectors, or risk contributions.

Within the S&P 500 from 1990 to 2014, all four naive-beta constructions beat the cap-weighted index on risk-adjusted returns, largely surviving transaction costs in out-of-sample tests. The paper's central point is that cap weighting embeds confident forecasts about future winners; naive diversification often wins because no-forecast portfolio construction can be harder to arbitrage away than bold sector bets that arrive late.

Availability

The published article is not downloadable from this site. For a one-on-one copy request, use the email request link above.