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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Continuous Kelly Criteria application

I am exploring the use of the Kelly Criterion for an institutional portfolio, namely a pension fund. For a continuous outcome process, the Kelly Optimal Proportion to invest into the risky asset at ...
4 votes
3 answers
2k 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. ...
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1 answer
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What do the existence and parameters of an efficient investment tell you about the value of a risk-free return?

I'm working on an unassessed course problem, Consider the following risky investments \begin{matrix} \text{name} & \text{expected return} & \text{standard deviation of return} \\ A & 9\% &...
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French and Fama - Alpha vs Residuals (Error)

When running a regression to empirically test models like CAPM or the Fama and French Model, why do we test the statistical significance of the intercept? Do we ignore the residual error? Why not ...
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121 views

Information Ratio Confusion in Grinold's Signal Weighting Paper

In the procedure Grinold outlines in his 2010 paper "Signal Weighting" for optimally combinining $J$ raw alphas, $\mathbf{a}_j$, he first assumes each $\mathbf{a}_j$ has been scaled so its ...
3 votes
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98 views

Tail Risk Hedging for Public Pension Plan

Very simplistically, ERISA rules require corporate pension plans to use market rates to discount their liabilities. If interest rates go up, the value of their pension liabilities goes down. Since ...
1 vote
2 answers
5k views

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 ...
6 votes
2 answers
7k views

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}) - ...
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Does it make sense to have an allocation to short term fixed income and a leveraged or unfunded position?

This may sound like a basic question but I have seen many large institutional investors have this as part of their asset allocation and am wondering why they do this? Does it make sense to have a ...
2 votes
4 answers
187 views

How do funds assess fees 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 ...
1 vote
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51 views

ML/DS in fixed income asset management

I am new to the topic but I would like to read papers/books/anything interesting to learn more how ML and data science is used in buy side Fixed income Asset management firms. Factor investing/signals/...
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225 views

"Better" forecasts lead to worse asset allocation performance

Short version If you're trying to produce an asset allocation system, it feels pretty natural to split it into an estimation component that forecasts asset means and covariance, and a weighting ...
2 votes
2 answers
339 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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710 views

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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172 views

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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1 answer
232 views

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 ...
1 vote
1 answer
138 views

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 ...
1 vote
1 answer
451 views

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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1 answer
295 views

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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2 answers
495 views

Backtest Results needed to Model Validate my Modern Portfolio Theory model

this is my 1st post, and I hope someone can help me! I have been searching for a week now without any luck I have built a Portfolio Allocation model based on Modern Portfolio Theory (MPT). I now need ...
4 votes
2 answers
168 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 ...
8 votes
1 answer
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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 ...
2 votes
2 answers
174 views

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 ...
3 votes
1 answer
1k 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 ...
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1 answer
663 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, if ...
5 votes
3 answers
302 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*} \...
3 votes
2 answers
664 views

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 ...
2 votes
1 answer
289 views

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. ...
2 votes
2 answers
201 views

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 ...
2 votes
2 answers
198 views

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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51 views

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 ...
2 votes
2 answers
108 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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1 answer
673 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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1 answer
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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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1 answer
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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 ...
4 votes
3 answers
521 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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1 answer
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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|...
3 votes
1 answer
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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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2 answers
3k views

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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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 ...
1 vote
2 answers
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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 ...
4 votes
2 answers
523 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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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 ...
1 vote
1 answer
277 views

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 ...
1 vote
1 answer
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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 ...