Risk-based asset allocation strategies are mainly used to diversify nominal asset weights. In this paper, we discuss the diversification of risk factors. The analysis is based on the idea of Partovi and Caputo (2004), who use principal component analysis to transform a portfolio into a set of...

It is a well-known fact in finance that classical mean-variance optimization often leads to highly concentrated portfolios. Giving equal weights to all portfolio assets will instead allow for maximum nominal diversification. More sophisticated ways of nominal diversification are the maximum...