One of the easiest ways to beat an index is to use diversification in your favor. The value of diversification increases with the decline in correlation across markets. When there is lower correlation, having more equal weighting will be valuable to a portfolio. A simple case is looking at the equal weighted Rogers Commodities index RICI versus an equal weighted portfolio. The RICI is the most diversified commodity index and commodities generally have lower correlation than equities. Even in this case, there is value with holding an equal weighted portfolio.
If you do not have a forecasting edge, the easiest way to sleep at night is to take the 1/N rule. Equal weight and go home. You will do well in the long-run.
No comments:
Post a Comment