CFA Lecture

The smart, the Dumb and the Alpha

The smart, the Dumb and the Alpha: a framework to understand Smart Beta and Risk Factor Investing

OBAM on Smart Beta and Factor Investing and a following Networking event.

Firstly, the Smart Beta initiative has been much talked about but it is not a well-defined concept. This presentation aims at presenting the differences between market cap weighted indices, smart beta approaches and risk factor investing approaches. From his analysis the most important finding is that there is a non-Smart Beta portfolio – the market cap weighted (MC) portfolio. Some people say that the value added by Smart Beta approaches is exposure to well known Risk Factors, but this presentation illustrates how by seeking direct exposure to Risk Factors, implies forecast-ing, and eventually providing alpha. The risk factor investing takes advantages of an ability to iden-tify arbitrage opportunities ability to assess mispricing, forecasting capabilities and speculation while the Maximum Diversification approach sole objective is to deliver the risk premium of an asset class.