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Research Allocation with Return Dispersion

This Research Bulletin looks at an often overlooked but important challenge—the allocation of resources behind investment strategies. All asset managers face the problem of how to best allocate resources, be it analysts, computational power or physical resources. Assigning more resources to segments that have more names to cover is one straightforward way. Alternatively, return dispersion (i.e., cross sectional volatility) reflects the opportunity set available to asset managers, and therefore may be another logical way. For CIOs who may consider assigning research resources via return dispersion, this article looks at the relationship between the size of different investment universes and the cross-sectional return dispersion.