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Portfolio Optimization: Thinking ‘Outside the Style Box’

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Swan Research — Innovative Portfolio Optimization

Swan is focused on help­ing pro­vide finan­cial advi­sors with the thought lead­er­ship nec­es­sary to dif­fer­en­ti­ate them­selves and make their busi­ness­es stronger and more valu­able. The pur­pose of this doc­u­ment is to high­light our the­o­ret­i­cal view that a diver­si­fied hedged assets port­fo­lio is a more effec­tive and effi­cient way to opti­mize a port­fo­lio than tra­di­tion­al port­fo­lio opti­miza­tion.

The goal will be to present evi­dence to sup­port the fol­low­ing port­fo­lio man­age­ment per­spec­tives:

• Tra­di­tion­al port­fo­lio opti­miza­tion is flawed and poten­tial­ly mis­lead­ing and the effi­cient fron­tier is of lim­it­ed use
• Tra­di­tion­al port­fo­lio opti­miza­tion leads to fair­ly indis­tin­guish­able asset allo­ca­tions
• Tra­di­tion­al port­fo­lio opti­miza­tion fails to min­i­mize loss­es, as they are built to min­i­mize volatil­i­ty
• An alter­na­tive approach to port­fo­lio opti­miza­tion (such as the Defined Risk Strat­e­gy), that direct­ly address­es
mar­ket risk, can lead to more effec­tive and effi­cient port­fo­lios
• Port­fo­lio results can be improved through the use of hedged assets
• A defined risk port­fo­lio, built upon the con­cept of max­i­miz­ing return while min­i­miz­ing an investors’ pos­si­ble
lev­el of “pain”, could intro­duce a par­a­digm shift away from tra­di­tion­al port­fo­lio opti­miza­tion

Swan believes it is impor­tant that investors have a bet­ter under­stand­ing of Mod­ern Port­fo­lio The­o­ry, how it is broad­ly used to con­struct port­fo­lios, and the impli­ca­tions of apply­ing MPT ver­sus dif­fer­ent approach­es to port­fo­lio con­struc­tion when con­sid­er­ing their own invest­ments, port­fo­lios and long-term goals.

This paper endeav­ors to pro­vide a broad­er under­stand­ing and the alter­na­tive approach to port­fo­lio con­struc­tion and opti­miza­tion inher­ent in the Defined Risk Strat­e­gy.

 

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By |2018-10-02T10:39:03+00:00September 25th, 2018|Research, Uncategorized|Comments Off on Portfolio Optimization: Thinking Outside the Style Box