Is Your Risk Model Letting Your Optimized Portfolio Down?
Aug 23, 2012
Many portfolio managers use multi-factor models, but not all factor models are equally effective in forecasting risk. Flawed model construction can result in optimized portfolios that are not efficient. This paper addresses the concern of portfolio managers that some risk models used in optimization may not be forecasting risk accurately, or may be creating suboptimal portfolios. We review pitfalls in portfolio construction and explain how MSCI’s best practices in model building are designed to overcome these challenges.