Risk is a major theme this quarter. Although equity markets have rebounded and Europe has averted another banking crisis, capital markets remain unusually uncertain. We focus on risk management as a source of “alpha” and examine the case for risk-based diversification.
Volatility is a useful measure for risk, but like any single number, it’s incomplete. There are other risks that are harder to quantify, but vital to building portfolios. Return-seeking investors must take risks the question is which to take and to understand the tradeoffs involved. In “Reflections” we consider one of the most significant tradeoffs investors face: leverage versus concentration. We find that most investors choose concentration risk, and we present arguments for an alternative approach.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.