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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68 views

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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80 views

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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1answer
73 views

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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469 views

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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50 views

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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199 views

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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92 views

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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65 views

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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177 views

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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1answer
121 views

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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1answer
68 views

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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91 views

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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312 views

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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346 views

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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212 views

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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529 views

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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128 views

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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451 views

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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116 views

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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174 views

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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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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Compute allocation given long-short portfolio weights

The amount of capital allocated in each asset given long only weights is calculated as $allocation_i \ = K\cdot w_i$. ...
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How to calculate “portfolio cumulative return” from individual price data and weight of them?

I'm trying to run backtest in a vectorized way using Python Pandas and need to calculate a portfolio cumulative return from price data and weight of asset data. I ...
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1answer
174 views

MPT Efficient portfolio /Asset allocation

When finding the optimal allocation using markovitz, the model will return '0' weights for assets that are "inefficient". What is the standard way for dealing with these weights if all assets have to ...
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172 views

Dynamic asset allocation strategies using a stochastic dynamic programming approach

I am currently reading Gerd Infanger's Chapter 5 on "Dynamic asset allocation strategies using a stochastic dynamic programming approach" in the Handbook of Asset and Liability Management edited by S....
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138 views

Preference between low (zero) and negative correlation

I am trying to create an artificial score grading user's portfolio correlation. In terms of diversification, lower correlation is obviously better. However, should negative correlation get a higher ...
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327 views

Problems with Black-Litterman: negative portfolio weights, and very poor returns

I am trying to implement the Black-Litterman model using own-defined views matrix (from consensus analysts). However, I have encountered the problems of negative portfolio weights in some periods, and ...
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788 views

Risk Parity / Equal Risk Contribution with Tail Risk Measures

Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
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1answer
495 views

Ledoit Wolf shrinkage with constant correlation prior with tawny and Riskporfolios

I am trying to use R to perform the shrinkage of covariance matrix towards constant correlation as defined in 'Honey, I Shrunk the Sample Covariance Matrix'. I see there are two packages where this ...
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Looking for: List of 30 top-performing value investors in the US (AUM 100USD mn+; 10 years)

we are currently looking to build another database sourced by crawling the SEC (freely available at SimFin). Our goal is to build a monthly updating database showing the holdings of the top value-...
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Mean Variance Optimization of 2000 pairs of securities (Python)

I would like to take the opportunity to ask for your help on an assignment I'm trying to complete. For this 'Modern Robo Advisory' course we are asked to solve a (target) goal-based investment ...
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1answer
211 views

Why is this utility function not picking up its penalty?

I was reading this seminal paper by Infanger. On page 40, Figure 11. was quite interesting. In particular I was interested in the top one, 19 Years and I wanted to reproduce this plot. To give some ...
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Is the 'constant weight in the risky asset' portfolio-strategy self-financing?

My question concerns a topic in quantitative finance that I feel is often brushed under the table: is a given strategy self-financing. We have two assets, one risky and one riskless, defined by the ...
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In practice, how do pension plans determine their risk appetite?

While I understand DB pension plans tend to use an ALM and surplus management framework to determine their asset allocation and risk/return objectives, I am wondering how in practice they determine ...
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Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?

The original paper by Markowitz from the '60s has ~20,000 citations (definitely popular). However several papers I came across show that a $\frac{1}{n}$ asset allocation gives higher Sharpe ratios (...
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Equivalent to Matlab's financial toolbox in python?

I've been working on making an asset allocation model that requires I price a lot of financial instruments (i.e. bonds, options) and optimize based on a certain constraint. I was originally doing this ...
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Calculating alpha and its meaning

According to wikipedia, CAPM model is described by: $E(R_{i})=R_{f}+\beta _{{i}}(E(R_{m})-R_{f})$ And according to website such as http://investexcel.net/jensens-alpha-excel/, $\alpha = E(R_{i}) - ...