In Part I of this series, we explored Grinold’s Fundamental Law of Active Management, and why the theory leads to misguided conclusions in the presence of asset correlations. In this article we will offer a primer on a useful tool for portfolio evaluation, Principal Component Analysis (PCA), and illustrate how PCA can help quantify the number of independent bets in a portfolio of correlated assets.
We draw a significant amount of inspiration for the material we cover on this blog from the publications of our financial brethren. Unfortunately, given the non-stop firehouse of information that increasingly characterizes the digital age, it’s nearly impossible to consume anything longer than a blog post. So it’s noteworthy that we were inspired to read – cover to cover – Wes Gray, Jack Vogel and David Foulke’s most recent book, DIY Financial Advisor.
This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry.
We firmly believe that the scientific process is alive and well in empirical finance, and that HLZ’s guidelines are an excellent example of the process at work. Financial practitioners should evaluate research with a healthy skepticism, and an awareness of the implications of data mining.
Now that we have specified the most appropriate benchmark, we can get down to the business of evaluating how well GTAA strategies have performed. How should we judge success? We submit that for GTAA strategies in particular we should judge results on …
We are a quantitative finance shop, right down to the ground. All of our portfolios are driven by supervised quantitative models with no discretionary intervention. As such, I was inspired to respond to a recent article on the risk of quant strategies, as I think the way our team approaches quantitative research diverges from how many outsiders perceive quant, and also from how many quantitative shops work.
One of the most common failings of the investment industry is the prevalence of poorly specified benchmarks. This is of critical importance because it’s easy for a knowledgable but disingenuous professional to manipulate the facts in order to…
In Part 1 of this series we explored why quality TAA strategies do not rely on ‘expert’ market calls, noting that the terms ‘discretionary’ and ‘tactical’ ought not to be viewed as two sides of the same coin. Rather, the best tactical managers increasingly …
We recently came across a couple of articles making the sensational claim that TAA is nothing more than a repackaged and dressed-up version of market timing. Both articles – and others, we’ve subsequently learned – point to a …
There’s really no nice way to say this, so we’ll just be plain: If mean-variance optimization (MVO) isn’t working for you, there’s a very good chance you’re doing it wrong. After all, we’ve been applying MVO with momentum-based estimates to manage live portfolios …
ReSolve Asset Management Blog is an investment research forum, opinion pieces, and educational material from the team at ReSolve Asset Management. Our views are driven by evidence based finance, with a special focus on asset allocation, factors and smart beta, retirement and endowment strategies, and quantitative methods.
