FTSE and Edhec create risk efficient indices
FTSE Group and Edhec -Risk Institute have launched an index series which uses a risk-adjusted strategy to that of traditional market capitalisation-weighted indices, to deliver investors with an optimal risk return ratio.
The FTSE Edhec-Risk Efficient Index Series, can be used by asset owners and investment consultants to capture equity market returns with improved risk/reward efficiency.
This efficiency is achieved by maximising the Sharpe ratio, by weighting the constituents of the indices accordingly.
This enhanced methodology, combined with a constituent base deriving from the FTSE All World Index Series, allows investors to develop new passive investment strategies.
Professor Noël Amenc, director of Edhec-Risk Institute, says: “Overall, traditional commercial capitalisation -weighted indices are not designed to be at the pinnacle of efficiency or provide well-diversified portfolios, as they principally track the market. Edhec-Risk Institute has therefore undertaken major research in a methodology that minimises excessive concentration of risk and affords investors the ability to benefit from the maximum Sharpe ratio portfolio. This simple concept is primarily based on the concept of a positive and robust long-term relationship between the risk of a stock and its return and we are pleased to have partnered with FTSE Group, an authority in the field of indexing, to achieve this within an innovative index series.”
Mark Makepeace, chief executive FTSE Group, adds: “Increasingly, investors are looking to diversify their core passive funds across a range of benchmarks weighted by market cap and other weighting schemes. The weighting methodology developed by the Edhec-Risk Institute provides a robust and transparent approach to constructing a benchmark seeking to achieve an efficient risk return.”
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