1. Smart beta portfolios represent a deviation from passive investing via market capitalization weights. Provide two reasons, with explanation, why market capitalization weights may not be an optimal allocation. [8]
2. Moreira and Muir (2017) develop the notion of a volatility managed portfolio. Explain what a volatility managed portfolio is and why the fact that volatility managed portfolios have outperformed the market portfolio does not follow standard financial theory. [8]
3. Of the smart beta strategies provided in Table 1 of the Topic 9 notes, which smart beta strategy best fits the findings of Moreira and Muir (2017)? Explain why. [4]

Allocation Strategy Mkt cap weights Diversity Weights Fundamental Equal XM XM/sum(XM) sp/sum(Sp) 1 Foundation Sharpe (1964) Fernholz & Shay (1982) Arnott, Hsu & Moore (2005) DeMiguel, Garlappi & Uppal (2009) Maillard et al (2010) Maillard et al (2010) Clarke et al (2011) Christoffersen et al (2010) Risk parity Diversified risk parity GMVP B/sum(B) o/sumo) -11/sum(-11) T-11/sum(1-11) 0-2/sum(0-2) E'R/sum(E-'R) Max decorrelation Diversified minimum var N/A Max Sharpe MPT Allocation Strategy Mkt cap weights Diversity Weights Fundamental Equal XM XM/sum(XM) sp/sum(Sp) 1 Foundation Sharpe (1964) Fernholz & Shay (1982) Arnott, Hsu & Moore (2005) DeMiguel, Garlappi & Uppal (2009) Maillard et al (2010) Maillard et al (2010) Clarke et al (2011) Christoffersen et al (2010) Risk parity Diversified risk parity GMVP B/sum(B) o/sumo) -11/sum(-11) T-11/sum(1-11) 0-2/sum(0-2) E'R/sum(E-'R) Max decorrelation Diversified minimum var N/A Max Sharpe MPT