FTSE Group and the EDHEC-Risk Institute have collaborated to create a range of risk adjusted indices, providing an alternative to traditional market capitalisation-weighted index ranges.
The FTSE EDHEC-Risk Efficient Index Series, available to investors globally, is designed to capture equity market returns with an enhanced risk-return ratio.
This enhancement is achieved by maximising the Sharpe ratio, which measures risk-adjusted performance, by weighting the constituents of the indices accordingly. The constituents in the indices are derived from the FTSE All World Index Series.
FTSE Group chief executive Mark Makepeace says: "Increasingly, investors are looking to diversify their core passive funds across a range of benchmarks weighted by market cap and other weighting schemes."
EDHEC-Risk Institute director Noël Amenc 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."
Consequently EDHEC has conducted research to create this methodology, which minimises excessive risk concentration while enabling investors to benefit from the maximum Sharpe ratio portfolio.
Amenc adds this method is based on the concept of a positive and robust long-term relationship between the risk of a stock and its return.
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