Semivariance in Risk-Based Index Construction

he purpose of an actively managed portfolio is to provide returns to investors above and beyond what they could obtain fiom a T passive strategy with the same level of risk. This implies that in order to evaluate the effectiveness of an active strategy, an investor needs a benchmark that corresponds to the level of risk that is taken. Most indexes available today are used to establish benchmarks for asset classes or investment styles, not a level of risk for an entire portfolio. Providing benchmarks for levels of risk requires a new class of indexes, risk-based indexes. The construction, properties, and performance of a particular set of risk-based indexes, the Quantidex Global indexes, are the subject of this article.' To create a set of risk-based indexes, a measure of risk must be selected. Quantidex uses historical semivariance below the hstorical mean as the risk measure. An alternative choice would be standard deviation.