Yves Choueifaty, President and Founder of TOBAM, explains why concepts such as “smart beta” or “neutral portfolio” require clear definitions and how the Maximum Diversification® approach answers the need for beta.
What is your definition of Smart Beta? What makes a beta smart?
TOBAM is one of the founders of what has been called by the industry the “Smart Beta” movement since 2005. I do not like the expression smart beta since it lacks clear definition and, as a mathematician, I do not like undefined terminology.
So, what is smart beta? Originally, beta is a measure of how much you access the systematic risk premium available in a given market. Secondly, what is the systematic risk premium? It is the return of the undiversifiable portfolio.
Most of the smart beta approaches emerged from the observation that the current representation of beta by the industry, which is the market capitalisation-weighted benchmark, is failing to achieve two objectives. The first objective is to be close to the efficient frontier ex-post, and the second is to be truly diversified.
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