Every investor should have an investment philosophy; it defines the risks that an investor can expect to be rewarded for taking, and those risks that are unlikely to reap any benefit. But how do investors know if their portfolios successfully target these intended risks and why should they care if they don’t?
In this discussion Dag Wetterwald and Jeremy Richardson discuss the importance of risk transparency and how risk models can be used to shed a light on hidden biases within portfolios; biases that have the potential to give investors unwelcome surprises. They also touch on the use of ‘randomised portfolios’ as a novel alternative way to explore inherent biases within an investor’s selection criteria. Aspects of the results question certain prevailing market beliefs about the excess returns available in the small and large cap universes.
