During recent turbulent years, investors became increasingly aware of the risk implied in their equity portfolios. Looking at the European equity market, it can be observed that, especially since 2008, so-called smart-beta strategies that also comprise the concepts discussed in this paper, experienced a significant inflow of assets. In this context, index concepts that select and/or weight stocks according to different measures of risk in order to decrease overall portfolio risk and subsequently decrease the likelihood of severe losses became increasingly popular.

This paper compares four risk-based concepts: the heuristic low-volatility concept, equal risk contribution concepts, minimum variance concepts as well as risk control strategies.

It can be empirically shown that along the time dimension, risk is not, as it might have been expected, rewarded by additional (long-term) returns. We rather find that the contrary is true: times of high market volatility are primarily accompanied by negative returns. The empirical results further suggest that risk-based concepts are superior to market-cap weighted indices not only in highly volatile or bear markets but typically also provide superior risk-return profiles in less turbulent markets, when asset prices are rising.

The following chapter provides a brief introduction to all concepts discussed in this paper. The focus lies on a two-asset scenario to increase understandability. Chapter 3 then empirically tests the index concepts using historical data ranging from 2002 to 2013. Chapter 4 provides a conclusion.

Risk-based index strategies – a comparison