Risk parity strategies gained a lot of attention in the post-2008 world of investment products. In a fit of defensive anxiety, investors flocked to products based on methods which purportedly would have lost less during the crisis. A recent Wall Street Journal article claims that “Assets in risk-parity mutual funds totaled $15.1 billion at the end of May, up from $73.6 million ...
Is Return Easier to Estimate Than Risk?
Most traditional optimizers have two inputs – mean and variance. In fact, most portfolio optimization frameworks pit some notion of return against some notion of risk. The conventional wisdom in the finance practitioner community is that high quality, accurate estimates are available for the risk inputs, whereas the expected return estimates are highly proprietary and subject t ...
Comments on the June 2013 Selloff
Investors have nervously anticipated the end of the Federal Reserve policy of stimulating U.S. economic growth with quantitative easing (QE3). The June 19th report by the Federal Reserve Chairman on the state of the economy reflected an unexpectedly positive view of the recovery. As a result...
Why Long-Term Treasury Bonds Still Belong in Your Client's Portfolio
Clients aware of the recent stretch of low yields for U.S. Treasuries have been asking their managers to explain why their portfolios contain long bonds. Given that ten-year bonds have been yielding about 2% and thirty-year bonds around 3%, near historical lows for the U.S., many clients question their exposure to interest rate risk. In this article we will attempt to elucidate the role played by long bonds in a well-constructed portfolio, and to provide some additional talking points that could be helpful for the advisor addressing questions about long bonds from their clients.
Portfolio Monitoring and Rebalancing: Art or Science?
Once a portfolio has been designed and implemented, what happens next? Studies show that asset mixes as well as proper rebalancing are keys to successful ROI. However, a portfolio based on certain historical statistical and financial analysis during a specific period in the past may only be valid for an indeterminate length of time. Macro and micro economics and their accompanying market conditions are continuously changing. So, how does an investment manager decide when it’s time to rebalance a portfolio?
Deconstructing Black-Litterman Optimization: A Brief Overview
Having a strong research and development presence is an extremely important part of any serious investment management effort. The most important theoretical concept underlying portfolio management today – Modern Portfolio Theory (MPT) — is a work-in-progress.
Modern Portfolio Theory Update
Since Harry Markowitz published his revolutionary paper in 1952 which eventually led to the development of a whole new branch of finance and a Nobel Prize four decades later, Modern Portfolio theory (MPT) has played an important part in investment management. However, what Modern Portfolio Theory promised in its genius of the Efficient Frontier was never borne out in its ability to produce practical portfolios. The failure is mainly due to certain unrealistic assumptions within Markowitz’s solution to the asset allocation problem. More specifically, ...
2012 Markowitz Awards Laud Innovative Practices in Asset Management
Since their co-founding in 2010 by New Frontier Advisors and the Journal Of Investment Management (JOIM), the annual Harry M. Markowitz Awards continue to recognize the transcendental impact of the work of Nobel Prize winner Markowitz as a financial economist and mathematician — with particular emphasis on theoretical finance and innovation in the practice of asset management.
Developing an Investment Strategy? Consider a Simulation Test
In our last discussion, we pointed out some of the fundamental flaws of backtesting investment strategies. So, what’s a more viable approach toward evaluating financial strategies? We believe a more statistically rigorous and objective means is through use of simulation tests. Briefly explained, a simulation test is a way of comparing procedures for building portfolios by applying them to a variety of simulated outcomes over time.
Be Cautions When Considering Backtests of a Proposed Investment Strategy
When evaluating new investment portfolios, the use of backtesting to justify portfolio construction and trading methods is a common marketing tool among many firms. Backtesting is a traditional way of saying that a proposed investment strategy would have worked in the past, and that it would likely be successful in the future. That assumption, however, is very contentious from several perspectives.