TOBAM’s new research paper “Portfolio Rho-Presentativity” to be presented at the 12th Annual Financial Risks International Forum
We are very proud to announce that TOBAM will be presenting our new research paper titled “Portfolio Rho–Presentativity” at the 12th Annual Financial Risks International Forum which will take place in Paris on the 18th & 19th of March.
This year’s forum will focus on “Low Interest Rate Environment: Search for Yield, Risk Management and Transitions.” The aim is to highlight the methodological and regulatory challenges confronting financial players in a low interest rate environment and the transition to a ‘new normal’.
We will present this paper which challenges traditional thinking, using an alternative representation to portfolio weights (industry-wide method of measuring portfolios exposure), by introducing an equivalent representation: the vector of correlations of a portfolio to all the assets of an investment universe.
This representation naturally leads to rho-presentative portfolios, which have a positive correlation to all assets and include well-known portfolios. This adds to the idea of a representative portfolio, such as the market-cap index, that is invested in all assets.
We then introduce maximally rho-presentative portfolios, that maximize their aggregate correlation – or exposure – to all assets, without constraint. We derive many properties of this new class of portfolios, that despite its small size encompasses many well-known long-only and possibly constrained portfolios and bring them together in a common framework.
A by-product of this work is the ability to explicitly characterize the impact of maximum weight constraints used by practitioners on strategies such as the Minimum Variance and Most Diversified Portfolios. Also, we provide several theoretical and numerical applications that illustrate our results.