RT Journal Article
SR Electronic
T1 R<sup>2</sup> and the Benefits of Multiple-Fund Portfolios
JF The Journal of Investing
FD Institutional Investor Journals
SP 43
OP 64
DO 10.3905/joi.2014.23.3.043
VO 23
IS 3
A1 Dale Domian
A1 David Nanigian
YR 2014
UL https://pm-research.com/content/23/3/43.abstract
AB Recent research shows superior performance by those equity funds that differ the most from their benchmarks. Existing studies, however, have not examined important questions about risk, such as the impact of holding a portfolio of low R2 funds on the reduction in portfolio risk achieved through diversifying across funds. This study provides some answers. Using a variety of risk metrics, the authors evaluate the benefits of diversification among both monthly and annually reconstituted portfolios, where funds are sorted into portfolios based on their quintile rank of R2. They find that the benefits of diversification are most pronounced within a portfolio of low R2 funds and that the benefits are increasing in the length of the reconstitution period.TOPICS: Portfolio theory, portfolio construction