michael (guest) meinte am 3. Nov, 22:30:
good paper, wondering what you think about this
Hi HedgeFundGuy...I found your paper extremely interesting, having been forwarded it by Teresa Lo. I haven't worked through the math in the middle section, so I'll just take your word on that part for now :-) . In the sections on either side, however, you do build a solid case from diverse research sources that the CAPM has little empirical support.
I am curious then, what you think of Ray Dalio's "All Weather" portfolio approach. You probably know who Dalio is, but for those readers who don't, he's the main guy at Bridgewater, a firm that runs many billions, including a bunch in what they dub a "Pure Alpha" hedge fund.
Dalio wrote an interesting paper a while back on Optimal Betas - that is, if you don't try to get the alpha from active management, then how do you diversify amongst beta sources (eg, the "typical" approach being 60% equity, 40% bonds, etc). Dalio has come up with this "All Weather" beta portfolio which, although at first for Dalio's personal family trust, apparently Bridgewater is now running a bunch of money on for others. Here is the link:
http://web.mit.edu/charvak/www/Science/Bridgewater/PandI_PMPT.pdf
Bridgewater's stuff is here: http://www.bwater.com/strategies-research/all-weather/
You will see that in Dalio's framework, he does evaluate assets along a capital market line, but then claims that they are all pretty much the same in terms of historical Sharpe ratio. Let me know your thoughts?
HedgeFundGuy antwortete am 7. Nov, 04:25:
Interesting guy, sounds like a great company. I'm a little confused about what he's trying to say in his 'engineering Targeted Returns and Risks' article. He seems to say that when you lever things so they all have the same volatility as the S&P (about 20%), they have about the same return. But Venture capital has a volatility of 35%, and a return of 9.5%, while the S&P500 has a return of 9%. I can't get these datapoints to match the "Leveraged Adjusted Expected Excess Returns" he lists below. I don't know what those abbreviations stand for in Chart 1, but they appear to reflect differences in returns between cash, bonds, and stocks. I don't think I'd agree that cash and bond have different expected returns, or I'd like to see his argument.I agree that optimizing over several betas is a great idea, and that optimizing over alpha is a zero-sum game. But I'm confused about where he says that as opposed to traditional portfolio theory that optimizes over mean and variance, he 'alters the expected risks and returns' of various asset classes (column 2 page 1)? Does he mean the ratio? If so, how? If he's altering the mere size of the risk and return with their proportionality intact, I don't see it as any different than the traditional approach.
michael (guest) antwortete am 7. Nov, 23:33:
I agree with you, when looking at his charts in detail, it seems like the Venture Capital datapoint isn't translating properly between the two graphs.I think to build confidence one would have to assemble a bunch of time series of the beta assets and actually try running it themselves (I plan to, eventually :-) )
My reading of what he is doing is transforming each asset (via leverage) into instruments all having the same volatility as the S&P 500, and then building the lowest volatility portfolio possible using combinations of those. But you are right that there is no difference in the optimal portfolio that would result versus traditional finance theory. I mean, you could forget about levering all the aassets initially, and simply build an efficient frontier using the assets as they are. Then simply pick the lowest volatility point on the frontier and lever that up.
