Scientific Beta

This paper introduces the methodology and conceptual grounding of the Scientific Beta Diversified Risk Weighted indices. Diversified Risk Weighting is a weighting scheme that attempts to equalise the individual stock contributions to the total risk of the portfolio, assuming identical cross-correlations between the constituents. This weighting scheme is a special case of the Risk Parity or Equal Risk Contribution (ERC) methodology. In the absence of any constraints, such as tracking error or sector neutrality constraints, Diversified Risk Weighting boils down to inverse volatility weighting.

This paper introduces the methodology and conceptual grounding of the Scientific Beta Diversified Risk Weighted indices. Diversified Risk Weighting is a weighting scheme that attempts to equalise the individual stock contributions to the total risk of the portfolio, assuming identical cross-correlations between the constituents. This weighting scheme is a special case of the Risk Parity or Equal Risk Contribution (ERC) methodology. In the absence of any constraints, such as tracking error or sector neutrality constraints, Diversified Risk Weighting boils down to inverse volatility weighting.