Asset Allocation Strategies Flashcards
While stocks have delivered significantly higher returns than bonds, they have also been xxxx times more risky (volatile)
3 times. 6% ann vol vs 18%
Overall what are some of the benefits of a 60/40 portfolio versus stocks alone?
close to stock like returns (5% real instead of 6.5%) but with only 11% ann vol (18%), Sharpe ratio of 0.4 (0.33 for stocks and 0.2 or bonds) and max DD is reduced to 50% not 80%.
Why is the 6040 PF less diversified than it might look?
Because almost all of the volatility is driven by the equities component.
What percentage are returns correlated to the return of the equity component of a 6040 PF?
Return around 98% correlated to the eq component.
What impact can using a Global 60/40 PF have on various characteristics of the PF?
Return is improved further closer to stocks alone, Sharpe rises to 0.48, ann vol reduced to 9.9% and max DD is only 32%.
Compare risk budgeting to traditional portfolio asset allocation
is based on the risk allocation of the portfolio, and does not take into account expected returns of assets.
What current approach is a version of risk budgeting?
Risk parity as pioneered by Bridgewater Assocaites.
How is Bridgewaters All Seasons risk parity PF constructed?
All Weather is as simple as holding four different portfolios each with the same risk, each of which does well in a particular environment: when (1) inflation rises, (2) inflation falls, (3) growth rises, and (4) growth falls relative to expectations.
The stock allocation is a mix of domestic and foreign, large and small cap stocks.
The bonds are 10 and 30.
Gold and commodities.
What are the attributes of risk parity - All weather?
Returns are 9%, ann vol is lower than bonds at 6%, sharpe ratio is 0.61 and MaxDD is 15%.
Risk premia strategies use a variety of tools to acheive essentially absolute returns, stripping out beta. What are those tools?
leverage, short selling, and derivatives like options, futures, swaps, forwards.
