Questions tagged [asset-allocation]

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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What's the point of resampling?

Resampling is a popular method for portfolio optimization. We repeatedly draw samples from a distribution, compute the optimal mean-variance portfolio and finally average over all allocations. However,...
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Sampling in Portfolio Optimization

I recently came across the following method for portfolio optimization: Let $Y$ be a random variable that describes the returns of $n$ assets. Fix a constraint matrix $A \in \mathbb{R}^{m \times n}$ ...
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What would be the problem with this pairs trading allocation scheme?

I am new to pairs trading, and I have come up with an idea of how to allocate capital between the long and short leg of a pairs trade. I feel that there is a problem with it, and I want to figure out ...
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What is the proper capital split/allocation between the long and short in a pairs trade?

I am trying to understand the following. If I have $100, how do I determine how much to allocate to the long and short of a pairs spread? You might say "use the hedge ratio you calculate, as that ...
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How to correctly use Fama-French factors (from investment portfolio perspective)?

I have several questions regarding Fama-French and other (for instance, BAB) equity return factors for practical purposes (portfolio construction, portfolio risk analysis, portfolio return analysis). ...
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utility function and CAPM in portfolio theory

I am trying to connect some dots in my understanding between 2 concepts. Utility function: I can see there there are different utility functions and I can draw them at different levels until I find ...
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Calculating average portfolio volatility

I have a question regarding calculating portfolio volatility. In my "problem", there are six portfolios. Five that have a holding length of one year and one that has a holding length of 200 ...
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What are the quantitative requirements to distinguish between asset classes?

What are the quantitative criteria to distinguish between asset classes? I ask this as many institutional investors are undergoing strategic and tactical asset class decisions at the moment. How ...
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How funds incur fee to investors?

I am trying to understand how funds incur fee onto its investors. I found out that a typical fund fee structure is 2% of AUM and 20% of the excess profit. If fund received 10MM capital from an ...
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Model for allocating capital between statistical arbitrage opportunities?

Dear users of quantstackexchange, I am currently creating a model with my team to look for the best (the highest returns) statistical arbitrage opportunity. This model will scan a significant amount ...
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Find k of n assets that "minimize" the correlation matrix

I'm trying to find an efficient way to select $k$ from $n$ risky assets that are the least correlated with each other. I know that I can perform a brute-force search of all $k$-sized combinations of ...
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Fama French regression with dummy variable

I am looking to run Fama-French regression on a portfolio of stocks. I am looking to specify a regime using a dummy variable. This dummy variable could be a low volatility/ high volatility marker. ...
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Statistical methodology for proving the stability in time of asset allocation weights

I am comparing the set of weights obtained by the classical Markowitz allocation process with those of another asset allocation technique I have devised. Markowitz's weights are unstable, as the ...
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How to evaluate Asset Allocation skill?

There have been studies that show that Asset Allocation can explain 90% of the variance of returns on a portfolio. If true and Asset Allocation is the primary driver of return risk, how can you ...
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How do I have to calculate the risk free rate of my two asset portfolio?

Good afternoon everyone! I have a question regarding the risk free rate of my two asset portfolio. For my course, we have to create a two asset portfolio with the time frame of 2015-2020 with monthly ...
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Minimize Composite Dispersion

Let's say that we have a composite of 10 fixed income portfolios, each with the same benchmark, the US Aggregate. Additionally, let's say that each portfolio has a position in Corporation ABC. The ...
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Why is Robust Allocation a worthwhile problem?

As opposed to Robust Bayesian Allocation solves see https://hudson-and-thames-portfoliolab.readthedocs-hosted.com/en/latest/bayesian/robust_bayesian_allocation.html. I don't get it. Why is this a ...
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How to reduce a covariance matrix after clustering?

I have an N = 100 covariance matrix. I am clustering the covariance matrix say into 5 clusters. How can I compute the reduced ...
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Calculation of Market portfolio from efficient frontier

I have a specific Portfolio frontier. Can someone provides me with details about how can I calculate the market portfolio from the efficient frontier? I know that I have to draw the tangent line from ...
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Calculating the eigenvector centrality of a portfolio described by a minimum spanning tree

I am working with the eigenvector centrality of a minimum spanning tree, which can be calculated as: v(i) = lambda^-1 * sum[Omega(i,j)*v(j)] where: ...
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Criteria for excluding an Asset Class from a Strategic Asset Allocation

While historically the return, volatility and correlation characteristics justified the inclusion of Sovereign Bonds (US Treasuries, European Central Bank Debt, etc) in Strategic Asset Allocation ...
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Capital Allocation, VaR, Expected Shortfall

Are there any serious drawbacks / weaknesses in the Euler allocation method, when used to allocate VaR capital (and potentially Expected Shortfall) to risk factors in a portfolio? I notice that ...
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Asset Allocation with near zero rates

With central banks pegging interest rates to near zero rates, an argument could be made that the future distribution of interest rates and bond returns are not normally distributed. How has modern ...
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I have missing data on my portfolio weightings but it can be solved through stock prices - how can I code to find this? [closed]

firstly I would like to say sorry for the title - its not the best. In fact its crap. Here is my problem (I am new to coding btw - still learning) I am using Python on my MacBook - using Terminal. I ...
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Portfolio Performance Attribution Using Carino Smoothing

I'm trying to conduct portfolio performance attribution using Carino smoothing, but it seems that the active returns do not match and I don't know why. Here is the example I use: \begin{array} {|r|r|r|...
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ETF pricing papers

May I request for research paper recommendations, if any, on existing models that study how the presence of ETFs affect equilibrium prices of the underlying assets? I am exploring a project on a ...
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Are heuristic portfolios efficient portfolios?

Markowitz's definition of an efficient portfolio is one that minimizes portfolio risk for a given level of expected return. He therefore calls portfolios along the efficient frontier "frontier ...
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Calculating the allocation of a fund given two correlated variables

Imagine this hypothetical situation: I have a time series of cumulative performance of a fund and two time series of equities that are highly correlated to them. I know that that this fund ONLY ...
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Difference between Money management / Asset allocation / Portfolio optimisation

maybe an ill-posed question, please advise 🙂 What is the difference between the 3 concepts? They all seem about optimising some risk/reward ratio... money management asset allocation portfolio ...
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Decomposition of Contribution to Variance

$C$ is a $N\times N$ covariance matrix of stock returns. Assuming $w$ is a vector of positions in each asset, the total variance of the portfolio is $$w^TCw$$ The contribution to total variance of the ...
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How to build a portfolio following the Smart beta process by dividend? [closed]

I'm having trouble finding the method to track smart beta dividend management. I have an Excel file which contains the prices and the dividends of certain companies, and I want to build a portfolio ...
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Kelly Criterion in correlated stocks

I would like to ask if there exist any mathematical proof or model which addresses how the Kelly criterion can be applied to find portfolio weights when the stocks are correlated.
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Equivalent constructions of risk budgeted portfolios?

When building an ERC portfolio given covariance $S$, I am familiar with the approach in optimalPortfolio. It takes the risks of a given weight vector $(w_i * (S w)_i)$, divides it by total risk to get ...
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Trading Ranges for Tactical Asset Allocation

Do methods exist to determine trading ranges around benchmark weights/strategic asset allocation weights for a tactical asset allocation from the correlation structure between the individual asset ...
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What are non-variance (non Markowitz) based theories of capital allocation between non-correlated assets?

A large amount of literature in finance accepts the standard deviation in return as if it were an accurate measure of "risk." What are some other financial theories for how to allocate capital ...
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Highest asset allocation contribution to the fund’s performance

I am preparing for 2020 May FRM II test and will appreciate any explanation for this question: In terms of asset allocation contribution, why is real estate made the highest asset allocation ...
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What does the concept "standard Markowitz approach" include?

Does "standard Markowitz approach" include only mean-variance approach or does it also include other approach such as minimum-variance approach?
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Portfolio/sub-portfolio optimization

I have a finite amount of 26 assets, the total amount of these assets needs to be allocated to 9 portfolios. Each portfolio has its own required return which needs to be met, using a min-variance ...
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6 votes
3 answers
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Is there a way to figure out "hot" strategies?

Apparently, short vol strategies have gotten crowded, according to the recent Bloomberg piece. When I read this, I thought how about factor based strategies -- value, growth, etc.? Aren't they ...
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How long a time horizon should be for verifying the effectiveness of an investment strategy?

Question To verify the effectiveness of a certain asset allocation strategy, how long a time horizon should be? Is there any academic paper regarding this topic? Question in more detial I know ...
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2 votes
1 answer
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How to calculate Information Ratio?

In the book titled "Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk" by Grinold & Kahn, the information ratio is defined as "the ratio of ...
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Strategic asset allocation research

I am currently trying to form an overall asset allocation strategy which combines base strategic allocation and tactical shifts. My model already incorporates the tactical shifts using various factors ...
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4 votes
2 answers
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Optimal investment mix of equity and debt in a single company, HY vs IG

What is the optimal mix of equity and debt that an investor should invest in a single company? If an investor invests in both the debt and equity of a company, they are in effect de-levering the ...
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Expanding window vs Rolling window z-score

I wish to find the z-score of a value measure( e/g P/E ratio) to compare them across asset classes, currently i am using an expanding window z-score to calculate the long-term mean and standard ...
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Crisis in in-sample period

I am backtesting a value momentum asset allocation strategy and my in sample period is from 2003 to 2011 and out sample from 2012 to 2019. I am optimising a cutoff for value on in sample to allocate ...
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4 votes
1 answer
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Stress Testing approaches at Pension Funds/Asset Management companies

I am looking for resources on Stress Testing for non-banking institution, specifically for long term oriented Asset Management companies, Hedge Funds, Pension Funds, and other Investment companies. ...
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Residual Risk and Variance

I've solved part a, but am struggling with b and c. $x_m$ is the market portfolio vector, and I think $T$ should be a diagonal matrix. Any hints greatly appreciated!
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Multi-period portfolio allocation: Time-inconsistent approach

Consider a multi-period mean-variance portfolio optimization so that at time $t$ I find the strategy that maximizes my expected terminal wealth $X_T$, subject to a constraint on risk, \begin{align*} \...
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Implementing leveraged Risk Parity Portfolio using Direxion 3X ETF

The "common man" version of a leveraged Risk Parity portolio (40% stocks and 60% long term bond, Quarterly Rebalanced) can now be easily implemented using the 3X leveraged ETF's (UPRO=stocks, TMF=...
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2 votes
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Black-Litterman proof with P=I and Omega=tau*Sigma

Elsewhere on this site (link), Richard notes that \begin{equation} \Pi_{BL} = \frac{1}{2} \Pi + \frac{1}{2}Q, \end{equation} so long as we set $ P = I $ (where $I$ is the identity matrix) and $\Omega ...
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