Mean-variance optimization (“MVO”) forms the foundation for most modern asset allocation methods. MVO works by shifting the weights of asset classes within a portfolio until an optimal mix is found. An optimal mix is found when the portfolio has the…

Liability-relative approaches first view the cash flows of the sponsoring organization in question and then attempt to build a portfolio of securities that will satisfy these payments as they come due. This is in contrast to the popular asset-only approach…

Until this point in the curriculum, risk has been looked at through an asset class perspective, answering the question, ‘What risks are inherent in each asset class?’ Switching to a new paradigm, portfolios may be constructed when viewing risk not…

Client needs, and preferences would seem to be a qualitative factor. How, then, would an analyst include these factors into the quantitative models required to analyze a portfolio from the perspective of modern portfolio theory? The following three approaches are…

The problem of illiquid assets complicates traditional asset allocation. Some of the most prominent investments in this category include direct real estate, infrastructure, private equity, and hedge funds. Illiquidity and Lack of Investable Index Illiquid assets represent those for which…

 Shortcomings of Mean-Variance Optimization As discussed, mean-variance analysis can help investors and advisors begin to zero in on an asset allocation while considering asset correlations, total return, and total risk. Effectively use of MVO will result in a specific…

Despite its limitations, MVO is commonly used as a foundation for other methods in practice. The following approaches aim to address and improve upon some of the common criticisms associated with MVO.  Reverse Optimization Reverse optimization involves a different approach…

Three Super Classes An asset class is a group of assets that all share some common elements. Asset classes help organize investment portfolios into separate components. We can start with the broadest sense of the word and divide assets into…

Most of the risks bondholders face in emerging market debt pertain to equity investments in those same markets, including but not limited to: More fragile economies. Weaker legal protections. Less stable political and policy frameworks. It is important to remember…

Going from capital market expectations to asset allocation requires analysis and interpretation. In order to improve performance and client-advisor relationships, it is essential to translate and identify the fundamental factors affecting portfolios and asset allocations. Macro-based Recommendations Macro recommendations involve…