Asset Allocation and Portfolio Construction

Training topics for this Modern Asset Allocation & Portfolio Construction are divided by day and include:

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