Portfolio Construction - Shift To Risk-Based Allocation

The Canadian Pension Plan Investment Board calls the mixture of asset-class and risk-factor diversification the “Total Portfolio Approach.” They do not allocate assets through conventional labels, such as “real estate” or “equities.” Instead, they rigorously delve into the more independent, fundamental return-risk factors that underlie each asset class, strategy and type of investment. This allows them to better understand and quantify the various return-risk characteristics of each investment program. With this understanding, they can more effectively combine investments into a truly diversified total portfolio that is designed to maximize expected returns at a targeted level of risk.

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