Astra Capital Management builds portfolios constructed to account for decades of research by leading academics and extensive empirical data. We implement diversified portfolios, not only with regards to the number of holdings but also diversified exposure to risk premiums that have demonstrated the historical tendency to drive returns.
What is a risk premium?
Risk premiums are the expected returns we receive in exchange for taking on certain risks. For example, the Equity Risk Premium is the difference in expected return between being invested in the stock market and the risk-free rate of return. This premium is the additional expected return we receive to compensate us for taking on these market risks.
When designing portfolios for our clients, we seek to gain diversified exposure to the following risk premiums:
• Size Premium: The historical tendency for smaller stocks to outperform larger stocks. Often referred to as SMB (Small Minus Big), or the difference between expected returns in smaller stocks minus the expected returns in larger stocks.
• Value Premium: The tendency for relatively cheap assets to outperform relatively expensive ones. Stocks with low BtM (Book-to-Market) ratios are considered growth stocks, and those with high BtM ratios are considered value stocks. Historically, value stocks have outperformed growth stocks.
• Momentum Premium: The tendency for an asset’s recent relative performance to continue in the near future. Historically, in aggregate, stocks that have had recent outperformance continue to outperform stocks that have shown recent underperformance.
• Implied Volatility Premium: The tendency for option-implied volatility to exceed realized volatility for the same underlying asset over time.