Asset Classes Versus Risk Factors and Something About Dr. Strange

While volatilities are easy to visualize, covariances are more difficult. Academics have standardized the measure into the concept of beta, which is easier to interpret.


BACK IN 2010, A FEW WEEKS AFTER I JOINED PIMCO, MARK Taborsky—who was a multi-asset portfolio manager at the time—suggested that we compare the diversification properties of risk factors with traditional asset classes. We eventually published an editorial in 2011 in the Journal of Portfolio Management on the topic. To my surprise, our two-pager received a lot of attention (unlike most of my publications) and was the most downloaded article in the Journal of Portfolio Management for over a year. It has ...

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