Geoff Considine

Portfolio Theory Vindicated

Aquater:

QPP is perhaps the best documented portfolio management tool ever built. There are over 800 pages or tests and analysis available at quantext.com. It does not make sense to describe the tool in depth in every article.

Geoff

Rolling 10-Year Market Return Hits 30-Year Low

Nice one guys! Bespoke has some of the best graphics around in terms of bringing issues to the fore!

How Counter-Productive Is Realtor Association Spin?

Barry:

This is a useful and insightful article. As Buffett says "you don't ask the barner if you need a haircut." By the same token, you don't ask a realtor (or their trade group) if its a good time buy a house. That said, the blunder in the Journal suggests a sad state of affairs in terms of fact checking.

The Cost of Volatility To Your Portfolio

Hmm--look at the VIX chart comapred to what happened. Perhaps history does repeat itself.

Using Default Risk to Limit Downside in Individual Stock Investing

Quaazy1:

Any Monte Carlo model that does not account for correlation between positions is essentially pointless. QPP has a sophisticated tool for capturing and managing the correlations between all positions. QPP is actually considerably more sophisticated that a tools based on Style Analysis in this regard because it captures all correlation effects and not just correlations due to mutual correlation to indexes.

I have performed long-term out-of-sample tests on portfolios of assets and have shown that QPP does a solid job of generating expected risk and return in total portfolios of correlated assets.

An Optimised Portfolio Using Only ETFs (IVV, IJH, IWM, EFA, EEM, SHY, IEF, TLT, RWR, IDU, IXC, IGE)

Hi Barb G:

I have come to fully appreciate the power of TIPS as diversifiers since I wrote this article. I discuss TIPS in many of my later articles.

Using Default Risk to Limit Downside in Individual Stock Investing

Hi Quaazy1:

The current version of QPP assumes no serial correlation in return in the simulation. This is measured historically, however. This is okay for investors with time horizons beyond about a year because the dcay time scale for autocorrelation is about a year in most studies. QPP is not intended to be a momentum investing tool.

Using Default Risk to Limit Downside in Individual Stock Investing

Bear Stearns Part 2: The comment above is especially notable given that Moody's had BSC rated at A2 until 3/14/08, at which time Moody's downgraded BSC to Baa1. QPP's projected 1% / 1 year risk as calculated at the end of February is in line with credit ratings right on the edge of junk (see chart in this article).

Portfolio Theory Vindicated

Piker:

The addition of IDU, IGE, etc. could either have been a lucky guess or good planning. BUT QPP is an objective model and it clearly showed that these made sense. This is not a lucky guess.

Using Default Risk to Limit Downside in Individual Stock Investing

FYI: Bear Stearns had a 1-year, 1% ile projected return in QPP of -75% for the period ending 2/29. In the article above, I suggested that individual investors avoid stocks with 1% ile projected return worse than -50% to -60%. BSC would have been avoided on this basis.

Portfolio Theory Vindicated

Hi Piker:

First, portfolio theory is broader than Harry Markowitz original conception. Forward-looking portfolio projections are a standard tool among institutional managers--and this is the modern manifestation of portfolio theory.

Yes, Quantext users could overfit history. But using the forward looking projections discounts recent out-performance and thereby helps to avoid this trap if 20/20 hindsight as you call it. QPP helps to avoid performance chasing.

The point is that this portfolio was designed more than two years ago and it has provided more return with less risk than the original 'policy' portfolio---as it was projected to do by QPP.

Regards,

Geoff

Using Default Risk to Limit Downside in Individual Stock Investing

Hi Manhapf:

The idea of using QPP as a leading projection of upgrades or downgrades is an interesting one--and you can look for future articles on this. I have been doing some testing and it appears that QPP has shown very high tail risk prior to some recent downgrades.

Portfolio Theory Vindicated

To Ganesh Kumar:

QPP does not simply do Monte Carlo on historical statistics. If it did, it would not be *forward looking*. The forward looking parameters use historical data but they are not simply a rehashing of historical data. You may find that the Ibbotson paper is helpful in understanding the theory behind this type of model--linked in my comments to Eric above.

Also, I do not understand the contradiction you mention...

Geoff

Portfolio Theory Vindicated

Further comment to Eric Hart:

After you reminded me of that Ibbotson/PIMCO study called Stragegic Asset Allocation and Commodities, I went back and looked at a couple of things. Here is the most interesting find. For portfolios in the risk range of my model portfolio, the study found that somewhere between 20% and 25% of the portfolio was optimally allocated to commodities. This is generally pretty similar to my model portfolio. The PIMCO study came out in late March of 2006:

corporate.morningstar....

The PIMCO study uses a similar conceptual approach as I did: forward looking portfolio theory and came to similar conclusions.

An Optimised Portfolio Using Only ETFs (IVV, IJH, IWM, EFA, EEM, SHY, IEF, TLT, RWR, IDU, IXC, IGE)

To Ardano:

I agree totally. New ETF's can provide powerful tools for better portfolios. Bogle warns that these new etf's can encourage speculation. Sure. But...they also provide powerful potential benefits in portfolio construction.