For many years, investors relied on the assumption that combining different asset classes within a portfolio was an effective way to maximize risk-adjusted returns. A key issue with that assumption, however, is that different asset classes may be exposed to the same systematic sources of risk, or risk factors. This may lead an investor to believe they are more diversified than is actually the case.
In contrast, examining a portfolio through a risk factor lens may allow investors to better understand overlapping sources of risk across multiple asset classes. We believe this can lead to more efficiently managed portfolios and better control of risk exposures and expected return. Below are the 18 risk factors that the factor lens uses to explain risk and return for investments or portfolios.
Exhibit 1: Factor Lens
[Exhibit 1: Factor Lens diagram. This is a visual exhibit from the original PDF showing the factor hierarchy: Residual, Style Factors (Equity Style: Low Risk, Momentum, Quality, Crowding, Small Cap, Value; Macro Styles: Equity Short Vol, Fixed Income Carry, FX Carry, Trend Following), Secondary Macro (Emerging Markets, Foreign Currency, Local Inflation, Local Equity), and Core Macro (Equity, Interest Rates, Credit, Commodities). The image itself was not captured in this text extraction and will need to be re-inserted as a graphic.]
Source: Solovis. For illustrative purposes only.
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