In Journal of Investment Strategies

Risk-only investment strategies have been growing in popularity as traditional in-vestment strategies have fallen short of return targets over the last decade. However, risk-based investors should be aware of four things. First, theoretical considerations and empirical studies show that apparently distinct risk-based investment strate-gies are manifestations of a single effect. Second, turnover and associated transaction costs can be a substantial drag on return. Third, capital diversification benefits may be reduced. Fourth, there is an apparent connection between performance and risk diversification. To analyze risk diversification benefits in a consistent way, we intro-duce the Risk Diversification index (RDI) which measures risk concentrations and complements the Herfindahl-Hirschman index (HHI) for capital concentrations. In an inverted caricature of pre-Markowitz investing, some funds are allocating assets strictly on the basis of risk and without regard for expected return. Strategies based on minimum variance, beta and risk parity have been growing, both in popularity and assets under management, as traditional investment approaches have fallen short of return targets over the last decade. Risk-only strategies are not a new idea. Markowitz [1952] identifies the minimum variance portfolio as optimal for a mean-variance investor whose estimates of asset expected returns are all equal. Risk With Return The Capital Asset Pricing Model (CAPM) predicts a linear rela-tionship between the expected excess return of a portfolio and its market beta. However, empirical studies show that this simple relationship is not correct. In a seminal article