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Abstract
Overview
Investors who still believe that a bold market cap-weighted portfolio always beats the less sexy quantitative approach to passive, diversified investing may be surprised by the results of new research showing that diversification-based beta, or “naïve beta,” outperforms the S&P 500 Index .
Authors Edward Qian , Nicholas Alonso and Mark Barnes (Director), all of PanAgora Asset Management , examine four types of naïve beta—equally weighted, minimum variance, maximum diversification and risk parity—and find that the risk-parity portfolio offers the best diversification and the lowest turnover.
“We’d like to remind people that in investing, ‘smart’ doesn’t always mean ‘good performance’, and ‘naïve’ can be a winning strategy,” says co-author Edward Qian.
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