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Modern Asset Allocation and Portfolio Construction

Day One

Review of MPT and Traditional Asset Allocation Practice

The impact of the Financial Crisis on investment management

  • Review of Modern Portfolio Theory (MPT) - discussion of pre-course readings and questions
  • Issues of traditional asset allocation industry practice
    • Pseudo asset classes & diversification
    • Risk characteristics of fixed weight policy portfolios
    • Investment horizons and time-variable risk and return characteristics
    • Drivers of the success of rebalancing strategies
    • Risk perception: tolerance for interim risk versus terminal wealth risk

Workshop: Factor risk budgeting in a mean-variance framework

Overview Newer Approaches to Asset Allocation

  • The need for flexible asset allocations: moving from static portfolio risk to managing portfolio risk and return over time
  • Industry Trends: “Smart Beta” and “Factor Investing”
    • Overview and critical discussion their potential in portfolio construction
    • Common misunderstandings
    • Overview factor modelling approaches
    • Factor research versus factor investment issues
    • Factor-efficient portfolio construction

Expected Returns

  • Return-Based Strategies:
    • Passive & adaptive asset allocation
    • Overview dynamic asset allocation
    • Tactical asset allocation
  • Estimating expected returns
    • Scenario-based approaches to return estimation
    • Incorporating active views
    • Black/Litterman & Introduction to Bayesian statistics
    • Applied return forecasting techniques: scoring and ranking techniques
    • Dealing with forecast confidence

Workshop: A simple macroeconomic approach to risk and return estimation

Day Two

Risk Expectations & Risk-Based Investing

  • Risk-based investment strategies
    • Minimum variance
    • Risk parity
    • Risk budgeting
    • Equal-weighted
  • Time-varying risk characteristics
    • Autocorrelation & volatility clustering
    • Introduction to GARCH
    • Comparison of volatilities and correlation dynamics
  • Drivers of the success of low risk investment strategies
    • Market risk anomalies
    • Understanding the positive relationship between risk and return
  • Covariance matrix estimation
    • Sample covariance, EWMA & GARCH covariance
    • Manually tweaking the correlation matrix
    • Statistical factor models: PCA
    • Bayesian shrinkage estimators
    • Noise filtering with random matrix theory

Workshop: A Bayesian interpretation of risk-based investment strategies

Estimation Risk and Its Management

  • Implications of uncertainty in expected returns and risk
  • A scenario-approach to explicitly taking into account uncertainty in expected returns and correlations
  • The statistical nature of the efficient frontier: from confidence bands to the Resampled Efficient Frontier™
  • Distorted risk and return: the impact of illiquidity, survivorship bias
  • Robust portfolio construction approaches

Workshop: Developing a quantitative volatility trading strategy

Quantitative Portfolio Construction beyond Mean and Variance

  • Overview risk measures beyond volatility
  • Higher moments: their use in risk measurement and portfolio construction and estimation risk issues
  • CVaR and LPM/UPM optimization
  • Behavioural Portfolio Construction: Applying insights from Prospect Theory
  • Random portfolios & convex hulls
  • Understanding the advanced optimization algorithms: threshold accepting, simulated annealing, genetic optimizer
  • Multi-criteria portfolio optimization: Example sustainability efficient portfolios

Day Three

Selected Topics in Quantitative Analysis – Part I

  • Tail risk management
    • The normal distribution assumption
    • Non-normal distributions: Cornish-Fisher, NIG, Normal Mixtures
    • Risk Budgeting with Modified VaR/CVaR
    • Modelling fat portfolio tails with elliptical distributions

Selected Topics in Quantitative Analysis – Part II

  • Dependence & Correlation
    • Diversification is more than correlation: overdiversification and diworsification
    • Taking into accounting asymmetries in correlations: equities, bonds and gold
    • Introduction to copula theory
    • Applications of copula theory: Analysing bivariate “pure” dependency and simulating dependent non-normal return time series

Workshop: Decision making under uncertainty in a scenario framework

Model Risk Management

  • The reality of financial markets: is it risk or uncertainty?
  • Decision making under uncertainty: minimum regret, minimax, maximax & Hurwitz criteria
  • Methodological aspects in backtesting
  • The trade-off between estimation and model risk in applied quantitative modelling
  • Outlines of a model risk management framework


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