Traditional allocation approaches assume that investing in a wider range of assets or asset classes will lead to a lower risk portfolio. It was also believed that the correlation between asset classes was relatively stable. But recent experience has found a number of issues with this approach. Instead of constructing portfolios using the traditional asset class approach, risk factor portfolio construction can lead to a better understanding of portfolio risk exposures.

Dan Miles is Managing Director at Innova AM, and can be reached at [email protected].