Our Market Optics chartbook contains data-driven insights that power our portfolio management teams’ views, ideas, and decisions. Each week, we’ll take a look a closer look at one of the charts.

This week’s topic: Diversification and factors

Index definitions

·         Investing in factors is about trying to improve the ride over long periods of time. They come in and out of favor.

·         Diversification is about trying to improve risk-adjusted returns, not trying to shoot the lights out with the highest returns all of the time. The longer perspective shows that diversification and a bias toward some factors have improved risk-adjusted returns.

The dotted line in the first chart is the capital allocation line. It connects the volatility and return of a 1-month Treasury bill with the risk and return of a combination of 60% S&P 500 and 40% Bloomberg U.S. Aggregate. Anything above the dotted line has a more favorable return-to-volatility ratio than anything on or below the line.

Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

Standard deviation is the square root of the sum of squared deviations from the mean. It is often used as a measure of volatility, variability, or risk. Standard deviation is based on historical performance and does not represent future results.


All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.



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