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…

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…

Portfolio managers rely on one of three frameworks for analyzing and managing their portfolios. The three approaches below have advantages and disadvantages, which the analysts and managers must know to make prudent investment decisions. Asset-only Approach This approach considers only…

There are three principal ways in which trade goods and services can influence exchange rates: Trade flows. Purchasing power parity. Current account. Trade flows tend to make up a small portion of total GDP and exert little influence on exchange…

Forecasting Real Estate Returns This reading focuses on directly held, non-levered, income-producing real estate. REITs are covered in further detail in other sections. Directly held real estate is distinct from other asset classes because it is immobile, illiquid, indivisible, and…

Governance Structures Corporate governance focuses on clarifying the mission, creating a plan, and reviewing progress toward achieving long and short-term objectives. In contrast, management efforts are geared toward outcomes—the execution of the plan to achieve the agreed-on goals and objectives….

Variance Covariance (VCV) Matrices The simplest and most commonly used method for estimating constant variances and covariances is to use variance or covariance–computed from historical return data. These elements are then assembled into a VCV matrix. The following table shows…