Wednesday, July 7, 2010

My Article at SeekingAlpha - Semi-Deviation & Semi-Correlation

The popular mean-variance approaches are well-documented methods of improving a portfolio’s risk-reward characteristics. The fact that Markowitz’s contributions to Modern Portfolio Theory have stood the test of time – more than fifty years later – shows the power of these methods. Over the years, additional models have been developed, that, for example, help investors establish reasonable assumptions and optimizer inputs such as expected returns, volatility (standard deviation), and correlations amongst asset classes.


It is important to study and measure true downside risk and the inter-relationships amongst various asset classes. More specifically, determine which particular asset classes may help when certain assets are declining in value. Semi-correlation as well as semi-deviation have proven to provide a more accurate picture – when applying portfolio diversification models.

In addition to improved risk measures and correlation studies, a variety of tools (such as Monte Carlo analysis) form a strong foundation for enhanced portfolio optimization and Post-MPT. On top of a “risk-management portfolio optimization engine,” robust alternative investment strategies add meaningful diversification and greatly improve expected risk/return characteristics to a portfolio.

Carlton Chin, CFA, is a specialist in strategic asset allocation, quantitative investment strategies, and alternative assets. Carlton has worked with institutional investors on asset allocation and is a fund manager. He holds both undergraduate and graduate degrees from MIT.

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