Diversification, Volatility and Surprising Alpha

Presented by Johannes Ruf (LSE)

Date: Monday 6 July 2020

Time: 14.00 BST

Webinar Overview:

It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other naive, non- optimized portfolios tend to outperform a capitalization-weighted index over the long term. This outperformance is generally attributed to beneficial factor exposures. Here, we provide a deeper, more general explanation of this phenomenon by decomposing portfolio log-returns into an average growth and an excess growth component. Using a rank-based empirical study we argue that the excess growth component plays the major role in explaining the outperformance of naive portfolios. In particular, individual stock growth rates are not as critical as is traditionally assumed.

Johannes Ruf is a full Professor at the London School of Economics (LSE) and a leading academic in mathematical finance. Prior to LSE, he was a Senior Research Fellow at the Oxford-Man Institute of Quantitative Finance and a Senior Lecturer at the University College London (UCL). Johannes was awarded his Ph.D. in Statistics at Columbia University in New York.

Johannes’ research interests include machine learning and portfolio theory. His work received several industry prizes including the ‘Morgan Stanley Prize for Excellence in Financial Markets’ and a Savvy Investor recognition for the ‘Best Factor Investing Papers of 2018.’ Johannes’ research was covered by Risk Magazine. He was a Fulbright scholar and won several teaching prizes at Columbia University and LSE. He co-authored numerous published research articles with practitioners and academics from different fields including Finance, Economics, and Operations Research.

Johannes is also an associated member at the UCL Centre for Blockchain Technologies and an associate editor of Applied Mathematical Finance and Stochastic Models. He served on the Expert Council for the ‘Pilot Project on Environmental Stress Testing - Testing Corporate Loan Portfolios for Drought Scenario,’ launched by the United Nations Environmental Programme. Johannes also served as the director of the MSc programme in Financial Mathematics at LSE.


Diversification, Volatility, and Surprising Alpha



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