Modern Asset Allocation & 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