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Risk & Reward in Asset Allocation

The top recent papers on asset allocation and risk management

Whether considering asset allocation from a strategic or a tactical perspective, the key to long-term success is to manage wisely the risk/reward tradeoff. This involves not only identifying the sources of likely excess return, but also managing the risk budget or risk tolerance in something approaching an optimal manner.

Below we look at a variety of papers, each covering the topic of risk & reward from a different perspective.

Savvy Investor

Risk & Reward: What Are the Odds? (Axioma, 2018)
In this paper, Axioma examines the risk and reward aspect of a risk analysis, along with the ways in which users can incorporate this info into a risk budgeting process.

Build a Better Path to More Efficient Income (AB, 2018)
(For compliance reasons, this paper is only accessible in North and South America)
In this article on income expectations, Alliance Bernstein discusses the concept of up/down capture and the creation of a better return sequence in order to help investors to access efficient income. 

2018 Long-Term Capital Market Expectations (Franklin Templeton Investments, 2018)
(For compliance reasons, this paper is only accessible in the EMEA region)
In this 15 page document, Franklin Templeton considers economic regimes and risk premia, in order to construct forecasts for the next 5 to 10 years.

Why Equities for Absolute Return? (Intech Investments, May 2018)
(For compliance reasons, this paper is only accessible in certain geographies)
With a deteriorating outlook for market-beta returns, investors are focusing more on strategies with absolute return objectives based on alpha.

Risk & Reward: The Theory and Practice of Portfolio Insurance (Invesco, 2017)
(For compliance reasons, this paper is only accessible in certain geographies)
This issue of "Risk & Reward" examines the theory and practice of portfolio insurance, examining four different approaches to managing downside risk.

How a Dynamic MAC Strategy Can Provide Return and Safety (PineBridge, 2018)
Multi-asset credit strategies may help investors to better meet their liability needs. PineBridge discusses the safety and return profile of multi-asset credit.

The complete downside protection toolkit (Fidelity International, Feb 2018)
(For compliance reasons, this paper is only accessible in the UK and Europe)
Different downside protection tools are useful for different jobs. Fidelity's toolkit helps investors to pick the best tool for the job when seeking to safeguard capital.

Optimizing Asset Allocation: Hedged Equity (Swan Global Investments, 2018)
Swan's Defined Risk Strategy uses options two ways - to hedge an underlying position, and shorter term market neutral strategies to generate income in order to assist with paying for the cost of hedging.

Balanced portfolios: Safer without bonds? (Hermes IM, Jan 2018)
Diversification is always good - discuss....

Embracing Downside Risk (AQR Capital Management, 2017)
This thoughtful paper from AQR examines the pricing of equity index options, showing that much of the empirical ERP relates to compensation for exposure to downside risk. Therefore, the authors argue, downside risk should be embraced.

Listed ETF Options (2018 Guide to ETFs and Derivatives, BlackRock)
(For compliance reasons, this paper is only accessible in the United States)
In the past 10 years, listed ETF volume has grown from 22% to nearly 40% of overall U.S. listed equity options volume (see 1 below). ETF options provide traders an increased portfolio flexibility to manage specific risks and find new sources of incremental income.

Risk & Reward: Currency Management with Style (Invesco, 2018)
(For compliance reasons, this paper is only accessible in certain geographies)
The optimal currency hedge may lie between the two extremes of a full hedge and no hedge at all. Invesco examines currency style factors to determine a beneficial currency allocation.

How to Take Control of Your Bond Market Risk (AB, 2018)
(For compliance reasons, this paper is only accessible in North and South America)
Credit risk and interest rate risks both pay off over time for fixed income investors, just usually not at the same time. AB looks at how to manage both risks simultaneously in a single portfolio and the benefits that this approach has.

Alternative Credit Strategies: A Diversifying Complement to Traditional Fixed Income Portfolios (Franklin Templeton)
(For compliance reasons, this paper is only accessible in the EMEA region)
Franklin Templeton introduces investors to the world of Alternative Credit.

Managing equity portfolio volatility by harnessing the volatility risk premium (Eaton Vance, 2018)
This popular paper from Eaton Vance explores the efficacity of option-based strategies that aim to harness the volatility risk premium (VRP), a well-researched phenomenon.

Stock/Bond Correlations: Relationship Troubles (UBS AM, Feb 2018)
UBS looks at long-term correlations between bonds and equities, examining recent volatility as well as the possibility that a regime of higher correlation is present currently between these asset classes.

Optimal Holdings of Active, Passive and Smart Beta Strategies (QMA, 2017)
QMA provides investors with ideas on how to arrive at optimal holdings of active, passive and factor strategies.

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