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.
Keep ReadingAsset Allocation
Apples and Oranges: A Random Portfolio Case Study
This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry.
Keep ReadingMeasuring Tactical Alpha, Part 2
When we left off in Part 1, we promised to examine how select Global Tactical Asset Allocation products stack up against the Global Market Portfolio from the perspective of several performance measures – particularly Sharpe ratio, alpha and information ratio.
Keep ReadingMeasuring Tactical Alpha, Part 1
Grinold linked investment alpha and Information Ratio to the breadth of independent active bets in an investment universe with his Fundamental Law of Active Management. Breadth is often misinterpreted as the number of eligible securities in a manager’s investment universe, but this ignores the impact of correlation.
Keep ReadingFallacies of the Fed Model
The Journal of the Society of Actuaries held a contest for articles on investment myths, and we are honored to have had our article on ‘Fallacies of the Fed Model’ chosen for publication in this prestigious journal. We want to thank our co-authors, David Cantor and Kunal Rajani of PriceWaterhouseCoopers, for proposing this collaboration, and for their critical insights and analytical contributions.
Keep ReadingSetting Expectations for Monthly Trading Systems
Systematic researchers overwhelmingly use monthly holding periods to test strategies. This is probably driven by the availability of long-term monthly total return data for a wide variety of indexes, where daily data is more scarce. This is fine to a point, but investors may not be aware of just how sensitive results might be to day-of-the-month effects which may not persist out of sample.
Keep ReadingDo You Spinu? A Novel Equal Risk Contribution Method for Risk Parity
Risk Parity seems to have (temporarily?) lost its place near the top of the institutional asset allocation wish list, no doubt because it proved vulnerable to policy shocks during last year’s central bank equivocation. Nevertheless we continue to believe the concept is valuable if thoughtfully applied.
Keep ReadingDynamic Asset Allocation for Practitioners Part 4: Naive Risk Parity
Our last ‘prequel‘ article explored the creation of a policy portfolio that utilizes a framework of structural diversification to hedge against the four major market regimes – inflationary boom, deflationary boom, stagflation and deflationary bust. In the conclusion of the article we said we would investigate a variety of quantitative methods of risk diversification to complement the more theoretical construct of structural diversification. This next instalment introduces naive risk management methods.
Keep ReadingStructural Diversification for All Seasons
Now that we are hip deep in our Dynamic Asset Allocation for Practitioners series (Parts I, II and III), it’s become evident that we may have skipped over some fundamental concepts in our rush to explore the more juicy material. This next series of posts is intended to lay the groundwork for how we think about the broader asset allocation problem.
Keep ReadingThe Permanent Portfolio Turns Japanese
Our last few articles dealt with the Permanent Portfolio, a widely embraced static asset allocation concept proposed by Harry Browne in 1982. To review, the simple Permanent Portfolio consists of equal weight allocations to cash (T-bills), Treasuries, stocks and gold to ward against the four major financial states of the world…
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