An investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.

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22
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3answers
3k views

How do you mix quantitative asset allocation with qualitative views?

Usually in asset allocation you have a quantitative approach (which can be from example mean-variance), but you (or you and your firm) also have a more qualitative approach given market-conditions, ...
13
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3answers
2k views

Why do expected return models and risk models use different factors?

This is a question responding to weekly topic challenge. I happen to see an interesting question from SYMMYS by Michael Kapler. I always approached expected return and risk modeling as separate ...
11
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5answers
3k views

Why is the Drawdown measure not used for portfolio optimization?

I was asked yesterday by a colleague why we are doing asset allocation using optimizers which target, for a minimum expected return: the portfolio with the minimum variance or the portfolio with ...
11
votes
5answers
1k views

How can higher co-moments be applied to portfolio optimization in an asset allocation context?

Traditional portfolio optimization involves mean variance optimization, where only the mean and covariance matrix of returns are estimated. What asset allocation and portfolio optimization techniques ...
8
votes
2answers
552 views

How to shift amongst asset classes in response to relative value views?

I am designing an asset allocation strategy/fund which invests in four asset classes (via four independent sub-funds): Domestic equity International equity Domestic fixed income Foreign currencies ...
7
votes
3answers
318 views

age-sensitive correlation measurements in finances

When it comes to comparing returns or prices of instruments like stocks/ETFs, are there any well-established formulas, or ones in common use, that place stronger emphasis on recent correlations more ...
7
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2answers
235 views

Reference material about Quantified Asset Allocation?

I am looking for papers that would describe asset allocation with geometry, group theory, markov chains or things like that. Keeping asset allocation in a range is easy but to keep it more precisely ...
6
votes
3answers
754 views

How do you remove expected returns from asset allocation strategies?

The classic mean-variance optimization problem tries to minimize variance of a portfolio for a given expected return: $$ \underset{w}{\arg \min} \quad w^T \Sigma w \quad \text{s.t} \quad \mu^Tw \geq \...
6
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3answers
420 views

Should the average investor hold commodities as part of a broadly diversified portfolio?

Many mutual funds sell "asset allocation" products which include appropriately sized investments in a variety of asset classes meant for a prototypical investor. Some of these, such as PIMCO, even ...
6
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3answers
263 views

How to measure investors' “experienced” volatility?

In asset allocation, you usually send reports to your clients where you will report the volatility of its portfolio. Assuming you only have monthly returns, you will compute volatility over a ...
6
votes
1answer
2k views

How can I use Entropy-pooling of Atillio Meucci to constuct a portfolio?

I am trying to get my hands on Entropy Pooling which was introduced by Meucci in this paper. As an example, assume I want to construct a portfolio with five stocks and I have my view on CVaR. How ...
6
votes
3answers
323 views

What is the canonical reference for Minimum Variance Portfolio's uniqueness?

I am writing a white paper in which I am trying to compare a strategy to different well-known - and classic - asset allocation optimization approaches. One of the methods I chose is the minimum ...
5
votes
2answers
221 views

How many data points are required to perform a fitting of GPD?

A friend of mine told me that their firm is using Extreme Value Theory (EVT) to compute value of the Expected Shortfall 99% of a portfolio for their asset allocation process. To do so, they try to fit ...
5
votes
1answer
152 views

Are there quantitative models which can guide one's choice of target risk?

Note: This question was written for the weekly topic challenge. Many asset allocation funds presume the investor knows his target risk level, typically on some spectrum from conservative (mostly G7 ...
4
votes
2answers
304 views

Which indices to use for an equity vs. fixed-income portfolio simulation?

I want to backtest several basic optimization methods (e.g. MVO, "most-diversified portfolio"), and I want to do this on a basket of different asset indexes. To start with, I want to simulate a 60/40 ...
4
votes
2answers
371 views

MPT: Adding constraint on minimum asset weight

I'm new to finance in general, and recently read about Modern Portfolio Theory. Now I'm wondering how to add the following constraint on asset weights: Each asset weight $w_i$ should either be $w_i =...
4
votes
2answers
157 views

How do you handle short-term asset allocation with Hedge-Funds?

Assuming I want to run an optimization over a short period, say 2 years, I would decide to take daily values in order to compute the efficient frontier of a portfolio. That works fine as long as I ...
4
votes
1answer
86 views

Monte Carlo based mean variance optimization

I was asked this question in an interview some years ago. It struck me as a poorly formed question. I thought I would put it out there to the community to see if I just simply missed something. ...
4
votes
1answer
88 views

What is smart beta, alternative index, factor investing?

What is smart beta, alternative index, factor investing? Are they basically the same thing? Construct a benchmark index using schema other than market cap?
4
votes
3answers
1k views

What are some of the major quantitative approaches to tactical asset allocation?

Note: This question was written for the weekly topic challenge. Many of you who deal with asset allocation will probably already be familiar with Mebane Faber's Timing Model, based on one of SSRN's ...
3
votes
9answers
675 views

Why would there be a positive risk-free rate?

Most financial models include a risk-free rate or risk-free asset. Why should there be such thing as a positive risk-free rate? I dont see why an asset would provide a positive (real) return if it ...
3
votes
2answers
6k views

Risk Parity portfolio construction

If I would like to construct a fully invested long only portfolio with two asset classes (Bonds $B$ and Stocks $S$) based on the concept of 'risk parity' the weights $W$ of my portfolio would be the ...
3
votes
3answers
770 views

Can I perform an asset allocation optimization if assets are perfectly uncorrelated?

(Here is a link to the original post) I received this interesting problem from a friend today: Assume that you are a portfolio manager with $10 million to allocate to hedge funds. The due diligence ...
3
votes
1answer
215 views

Whare are the common Global Asset Allocation indices?

I would like to make a comparison between some multi asset class strategies and some kind of benchmark. In this situation, the classic benchmarks like MSCI World (for Equitites), GSCI (for ...
3
votes
1answer
273 views

Portfolio choice problem of a CARA investor with n risky assets

Ok, I am working on a problem that consists of the following: I am looking to solve the portfolio choice optimization problem (maximizing utility with a known utility function) in the case where all ...
3
votes
0answers
62 views

Reference Request: Horse Race for Portfolio Allocation

Probably the most popular horse race study for portfolio strategies is Optimal versus Naive Diversification: How Inefficient Is the 1/N Portfolio Strategy?, with DeMiguel, L. Garlappi and R. Uppal....
2
votes
1answer
120 views

Simulating returns from ARMA(1,0)-GARCH(1,1) model

I want to obtain a simulation of one-step ahead forecasts of stock returns process governed by ARMA(1,0)-GARCH(1,1) process. The returns are of form: $x_t = \mu + \delta x_{t-1} + \sigma_t z_t$ From ...
2
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3answers
118 views

Multi-asset class allocation

How to allocate asset classes in a multi-asset portfolio? An institutional client needs to meet his pension liabilities, and suggested a multi-asset-class strategy. I'm trying to find ideas to pitch. ...
2
votes
1answer
205 views

How to enumerate all the possible portfolios with a given target volatility?

Let's say I have $n$ assets and their returns are stored in a matrix $X \in \mathbb{R}^{m \times n}$ (i.e. I have $m$ returns for each of them. The covariance matrix of the returns is $\Sigma \in \...
1
vote
2answers
116 views

Controlling portfolio concentration

I'm working with a heterogenous basket of instruments (in volatility terms). Risk parity allocation seems to be useful for the portfolio( * 1/Volatility). However, there are times when the ...
1
vote
1answer
156 views

What's wrong with this asset growth simulation?

Sorry if this is too basic, but I have this spreadsheet that simulates asset growth of a portfolio under a given return and risk using MPT. Here is a plot of probability distribution of asset ...
1
vote
1answer
463 views

why banks shall keep short term gap position low?

I'm reading "Insights for Bank Directors" (http://www.stlouisfed.org/col/director/reference_view.htm), a good introduction to commercial banks, based on a virtual bank "Insight". It talks about Gap ...
1
vote
1answer
744 views

How to compute portfolio weights from multivariate regression results?

Assuming that I performed a multivariate regression and I found a set of $k$ coefficients $\alpha_1, ..., \alpha_k$ for each of the factors $F_1, ... F_k$. I have then computed the following ...
1
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1answer
53 views

Understanding portfolio weights and purchasing stock in modern portfolio theory

Recently I've been learning about the markowitz algorithm. It's pretty interesting, but I'm curious how we apply this in practice. Lets say I have some optimal portfolio: $R_p = x_aR_a + x_bR_b$ ...
1
vote
1answer
247 views

How to answer this interview programming question about drawdowns?

I saw this question as an interview, and to be honest, I have no idea what it's even asking for: Write a function (in R or Python) that finds the stock drawdown which will trigger a rebalance, ...
1
vote
1answer
68 views

bootstrap asset allocation

I want to ask if the bootstrap method for asset allocation is preferable. For instance, suppose that we have data for the past returns for two stocks. Is it wise to generate the efficient frontierby ...
1
vote
1answer
278 views

Volatility Estimation

Let say I ran two strategies and got its weights at each rebalance and equity curves. I would like to combine these systems to get the performance if I were to trade them concurrently from a portfolio ...
1
vote
0answers
37 views

Modelling log-returns and calculating the portfolio return

I know this might be a trivial question, however, I would be grateful for some clarification. I am working on weekly log-return data, doing volatility-foracasting using GARCH models and then using ...
1
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0answers
37 views

Hypothesis Testing for Portfolio Weights

Investigating international diversification is an ongoing topic in portfolio allocation literature. Britten-Jones and Kempf-Memmel , for example, use derived properties of the distribution of ...
1
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0answers
93 views

Quantitative method to select tactical bands for asset allocation

Do you know a study with a methodology for selecting tactical bands (or the allowed deviation from a strategic asset allocation)? Thanks
0
votes
2answers
78 views

High values of skewness and kurtosis of realized protfolio returns

I am investigating some asset allocation strategies and I am wondering about the results I obtain. I am working on monthly and weekly data of the same stock indices (SP500, FTSE 100 etc). And when I ...
0
votes
1answer
36 views

Transaction Costs Measure ATOP: What does it mean and exactly measure?

I went through some presentations about LowVol strategies for some indices. In the presentations were tables with average returns, vola, Sharp ratio and ATOP. I have no clue what this ATOP is supposed ...
0
votes
1answer
45 views

Portfolio of Assets

The following represents a model for an economy. At time $t=0$, four assets have the value $X_1= £5$, $X_2=£5$, $X_3=£10$ and $X_4=£4$. Three possible states of the world exist ($\alpha_1$, $\...
0
votes
1answer
127 views

Asset Liability Management Test Topic Interpretation

I will write a test based on Excel and one of the topics is "The Asset Liability related analysis: including the input assumptions generation, constraints, portfolio optimization analysis and results ...
0
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0answers
22 views

Calculating portfolio returns from a dynamic, optimal re-balancing strategy

I am calculating a dynamic strategy with optimal re-balancing as in here. As a result of maximizing the expected utility function I obtain the weight for the risky asset in period $t=0$. All such ...
0
votes
0answers
19 views

Asset weights in asset allocation

I am trying to solve an asset allocation problem by approximating the expected utility of a portfolio. I am using the following formula: $E_t [U(1 + w_t' r_{t+1} + w_{ft} r_{f, t + 1})] = m_{1,t+1} - ...
0
votes
0answers
80 views

backtest asset allocation strategies

I've searched the site but haven't found an easy way to backtest my personal portfolio allocations. Suppose I want to know the total return for the following portfolio from Jan 1, 2009 to Dec 31, 2014:...
0
votes
0answers
15 views

building a correlation of equity portfolio to custom benchmark 60/40

Hi i have built a custom portfolio of equities with weights but would like to plot the daily, monthly and annual correlation to 60/40 benchmark. Please see code below and suggest how I can do the ...
0
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0answers
70 views

Asset allocation and GARCH models

I am trying to solve an asset allocation problem and I am having some troubles grasping the concept. I am working with excess returns on 4 stock indices and I am obtaining the excess returns forecasts ...
-1
votes
1answer
97 views

Math basics of Equally-weighted Risk contributions

i'm writing my BA Thesis about "Equally-weighted Risk contributions". Can anyone recommend math books for further understanding of Risk contributions?