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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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, ...
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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
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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 ...
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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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Optimization: Factor model versus asset-by-asset model
In portfolio management one often has to solve problems of the quadratic form
$$
w^T \Sigma w + w^T c \rightarrow \min_{\omega}
$$
with portfolio weights $w \in \mathbb{R}^N$ a constant $c \in \mathbb{...
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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 ...
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How to construct a Risk-Parity portfolio?
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 then be ...
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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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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 \...
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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 ...
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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 ...
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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 ...
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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
...
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How can I simulate portfolio risk (diversification) with a 'Wheel of Fortune' like investment options/returns?
Say I have 6 possible investment options with the following probability of success and the corresponding returns:
...
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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 ...
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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?
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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 ...
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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 ...
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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 ...
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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}) - ...
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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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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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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 ...
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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. ...
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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 ...
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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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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 ...
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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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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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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.
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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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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 ...
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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 ...
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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 = ...
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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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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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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 ...
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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 ...
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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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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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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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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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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 ...
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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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Is mathematical finance relevant in asset managament?
I was hoping to consult on the relevance on the relevance of mathematical finance in the asset management business. Traditionally, mathematical finance focuses more on topics related to stochastic ...
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What ultimately determines trading costs?
In equity markets, there are obvious transaction fees such as brokerage, commission fees etc.
But if I wanted to do a more in-depth analysis of the determinants of transaction costs, what would be ...
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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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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 ...
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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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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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