Is There A Better Way To Build “Optimal” Portfolios?

The suggestion that investment portfolios can be quantitatively optimized became controversial almost as soon as Harry Markowitz launched the modern age of portfolio design in 1952, courtesy of his famous “Portfolio Selection” paper. Not because anyone disputes the goal of engineering a portfolio that maximizes return for a given level of risk. That’s every investor’s goal, even if she doesn’t think in those terms. Rather the debate centers on how portfolio optimization is best accomplished. Markowitz’s original proposition was a relatively simple affair, largely due to the limits of computational resources in the mid-20th century. Professor Markowitz developed a methodology…

Monthly Market Review – September 2019

Highlights The U.S. economy continues to grow, however, it has also shown some signs of a potential slowdown in growth. The stock market continues to rally despite headwinds from an ever-escalating trade war between the U.S. and China. Falling interest rates has the bond market considerably higher.  Meanwhile, the yield curve remains relatively flat after inverting in August. Economic Review The U.S. economy continues to look fairly strong, but has shown some indications of a potential slowdown in growth.  In the second quarter of 2019 GDP grew at an annualized rate of 2.0%, its slowest in five years.  However, over…

What Should You Expect From Factor Risk Premia?

The rise of factor-based investing over the last two decades has greatly impacted the investing landscape. From “explaining” active strategies to identifying sources of risk and return in financial markets with greater clarity, viewing asset pricing through a factor lens has been nothing short of a revelation for money management. But amid the rush to tap into what is arguably a better way to analyze, design and implement portfolios, how much do we really know about the historical record for the major factor premia? Perhaps less than we think. Slicing and dicing factor returns is a relatively recent innovation and…

Are Your Tail-Risk Estimates Reliable?

Few aspects of risk management come with higher stakes than estimating tail risk.[1] Just as a chain is no stronger than its weakest link, an investment strategy will be judged (at least in part) by the depth of its biggest losses. Unfortunately, tail risk is one of the toughest challenges for investment analysts for a simple reason: the supply of data for studying extreme events, by definition, is scarce.   In some cases, there may be just enough historical data to offer a hint of how returns behave at the outer edges of worst-case scenarios. The deepest 1% losses, for…

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