Essays on Smart Beta or Unintelligent Alpha Coursework

Download full paperFile format: .doc, available for editing

The paper "Smart Beta or Unintelligent Alpha" is a good example of finance and accounting coursework.   A smart Beta ETF is a form of traded funds that use different index structure regulations as an alternative for the usual cap-weighted strategy, in a more transparent way. It takes into consideration factors such as volatility, size and value. Smart beta is a to a certain extent a vague term in contemporary finance in that, strategies involved in Smart beta try to deliver an improved risk and return trade-off than the conservative market limit weighted indices by through other weighting schemes based on actions like volatility or dividends Smart refers to the use of a different tactic to a certain extent instead of following an index's market-cap allocation.

Smart-beta asset policy is projected towards inserting value through strategic choosing, weighting and rebalancing the firms build into an index base upon purpose factors Strategic beta refers to a rising set of indexes as well as the asset products that follow the indexes. A greater part of these indexes intends to improve profits or reduce risks in relation to the traditional market that relies on capitalization and weighted benchmark. Objectives of Smart Beta include; 1) Return enrichment; it should be able to enhance the investment. 2) Risk cutback; risks should be lower when compared to the returns on investment. 3) Enhanced diversification; 4) Access to factor exposure; 5) Cost savings; should be able to save on cost 6) Income generation; Smart Beta index tackle index-level risk in a number of ways, that is; 1.

Fundamental indexes weight constituents by a composite score based on companies’ economic fundamentals 2. Equal-weighted indexes weight constituents equally 3. Equal risk contribution (ERC) indexes weight constituents’ contributions to index risk equally 4.

Minimum variance indexes select stocks whose volatilities and correlations minimize index-level risk 5. Maximum diversification indexes select stocks which maximize the index’ s diversification level 6. Maximum Sharpe ratio indexes select stocks which maximize the index’ s Sharpe (return to risk) ratio. Smart Beta is used by investors in the following ways; To enhance investment precision Smart beta indexes pursue clear, publicly existing regulations. In addition, since smart beta indexes entrench the returns of logical investment strategies, they help shed light on the sources of return of many unrestrained active funds as well as their managers.

Smart beta indexes assist investors to analyze their exposure to the market beta, sector, currency and factor risk and to highlight non-systematic risk which in turn helps ensure asset owners get value for the fees they pay to active managers. To advance investment outcomes Smart beta indexes can be used to address market participants’ risk concerns for instance, desire to reduce volatility or improve diversification and to target desired return outcomes through exposure to the factor risk premium. Smart-beta, as a result, increases the variety of choices for the asset owner. To help manage portfolio costs Smart beta indexes offer exposure to systematic investment strategies, many of which have traditionally been offered by active fund managers under the guise of manager skill, often at relatively high fees.

Switching to the smart beta can, therefore, help generate cost savings, benefiting members of long-term savings schemes.


Back, K. 2010. Asset Pricing and Portfolio Choice Theory. New York: Oxford University Press.

Ben Dor, A., and Z. Xu. 2011. “Fallen Angels: Characteristics, Performance, and Implications for Investors.” Journal of Fixed Income, vol. 20, no. 4 (Spring): 33–58.

Black, F., and R. Litterman. 1990. “Asset Allocation: Combining Investor Views with Market Equilibrium.” Goldman Sachs Fixed Income Research (September)

Black, F., and R. Litterman. 1990. “Asset Allocation: Combining Investor Views with Market Equilibrium.” Goldman Sachs Fixed Income Research (September).

Ilmanen, A. 2011. Expected Returns: An Investor’s Guide to Harvesting Market Rewards. Hoboken, NJ: John Wiley & Sons

Mehra, R. 2008. “The Equity Premium Puzzle: A Review.” Foundations and Trends in Finance, vol. 2, no. 1: 1–81.

Download full paperFile format: .doc, available for editing
Contact Us