Sunday, July 10, 2011

Investment Portfolio Optimzation

Themes driving weighting or sensitivities to each of the asset classes within a portfolio:
  • The correlation of the asset class with other asset classes in the portfolio. Want lower correlations. E.g have equities and commodities in the portfolio. When equities are doing bad, the commodities are either steady or going up.
  • What is the proportion of the asset class relative to the total market portfolio consisting of equities, fixed income, commodities, natural resources. Like to weigh more towards the expected asset class that will make up for majority in future.
  • Expected return vs the downside risk. Assign more weight to asset class whose expected return is very high vs downside. E.g double down on equities/fixed income during the market lows of Oct 2008 or March 2009
The expectations for the above three mixes are shifting constantly with the change in economic environment constantly but adjusting the portfolio the advantage of unusual situations should yield satisfactory outcomes vs the do nothing portfolio.

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