Scientific Beta

This paper explains the rationale behind the main approaches to diversification, and gives an introduction to the diversification strategies available on the Scientific Beta platform, namely Maximum Deconcentration, Diversified Risk Weighted, Maximum Decorrelation, Efficient Minimum Volatility and Efficient Maximum Sharpe Ratio. We also analyse and compare these strategies through the lens of their construction methodologies. Additionally, we introduce the Diversified Multi-Strategy weighting scheme which combines four of the diversification-based weighting schemes, in order to diversify away any remaining model risk.

This paper explains the rationale behind the main approaches to diversification, and gives an introduction to the diversification strategies available on the Scientific Beta platform, namely Maximum Deconcentration, Diversified Risk Weighted, Maximum Decorrelation, Efficient Minimum Volatility and Efficient Maximum Sharpe Ratio. We also analyse and compare these strategies through the lens of their construction methodologies. Additionally, we introduce the Diversified Multi-Strategy weighting scheme which combines four of the diversification-based weighting schemes, in order to diversify away any remaining model risk.

This paper can be seen as a starting point for developing a better understanding of the common features and differences among diversification strategies. It serves as a guide for delving into the more detailed discussions provided by other papers in the Scientific Beta White Paper Series on how these diversification strategies can be used as key ingredients in an equity factor investing effort.