Transcription of Risk-BasedIndexation
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Risk-BasedIndexation
Risk-Based Indexation . Paul Demey S bastien Maillard Research & Development Research & Development Lyxor Asset Management, Paris Lyxor Asset Management, Paris Thierry Roncalli Research & Development Lyxor Asset Management, Paris March 2010. Abstract A capitalization-weighted index is the most common way to gain access to broad equity market performance. These portfolios are generally concentrated in a few stocks and present some lack of diversification. In order to avoid this drawback or to sim- ply diversify market exposure, alternative indexation methods have recently prompted great interest, both from academic researchers and market practitioners. Fundamen- tal indexation computes weights with regard to economic measures, while risk-based indexation focuses on risk and diversification criteria. This paper describes risk-based indexation methodologies, highlights potential practical issues when implemented, and illustrates these issues as it applies to the Euro Stoxx 50 universe.
RISK-BASEDINDEXATION However,thiscomputationispurelytheoretical. Inordertoreplicatethisindex,wehaveto build a hedging strategy that consists of investing in stocks.
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