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 set…

The global market portfolio is the weighted sum of every asset globally. It represents a well-diversified asset allocation that can serve as a baseline approach and help mitigate concentrated outputs often arrived at by MVO. The asset mix is adjusted…

An economic balance sheet differs from a traditional balance sheet as it includes tradable financial assets and non-tradable extended assets and liabilities. Extended assets often include the relatively large values of residential real estate and the present value of human…

Accurately modeling fixed income return involves carefully considering all potential factors contributing to gains and losses when holding the security. The model can produce precise output by thoroughly examining each component and applying sound financial concepts. Though the process may…

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…

Rebalancing as a Discipline After choosing a strategic asset allocation, portfolios will drift away from those allocations as market conditions change and affect the relative weights of investments within a portfolio. One choice is clearly to ‘do nothing,’ also known…

Passive Vs. Active Management In investment choices, investors have the initial question of whether their investments should be passively or actively managed. Passive management refers to tracking the performance of various indices, such as the S&P 500, and not making…

 The global market portfolio is a theoretical representation of the aggregation of every investable asset with respective weights held constant. While there may be an ETF somewhere that attempts to mimic this, it is safe to say that the…

Utility and Maximization Strategic asset allocation involves deciding among the various securities within a portfolio and the relative weightings of each. Asset allocation differs from Investor to Investor as the optimal mix depends on the investor’s preferences. The utility theory…

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…