Risk and Portfolio Construction

Asset Allocation and Portfolio Risk Management

Portfolio Management - Risk Mitigation and Asset Allocation Decisions

Portfolio risk and asset allocation go hand in hand. Besides merely being cognizant of each type of specific risk, which risks should one focus upon managing, and what are the ways in which these decisions influence asset allocation decisions? 

Herein we have included a shortlist of papers on both asset allocation and risk management. A previous Savvy Research article and several new papers discuss downside risk in detail, while other papers examine risk models, stress testing, factor investing, and asset allocation decisions. 

Savvy Investor

Toward Dynamic Stress Tests (Axioma, Nov 2017)
Axioma discusses a technique used to enhance traditional transitive stress tests, namely, by using statistical techniques to identify different regimes, and when appropriate, dynamically adjusting each regime's impact upon the stress test.

An Asset Allocation Primer: Markowitz, Kelly and Risk Parity (PIMCO, Oct 2017)
This article describes and contrasts the mechanics of standard asset allocation models, including the utility based, Markowitz, Kelly, risky parity and fixed allocation approaches.

Factor Investing and Asset Allocation (CFA Institute Research Foundation)
Only recently has factor investing become widespread. What has motivated this change in the industry, what techniques do factor investing analysts employ, and what results might investors expect from these investments?

Understanding Active Risk and Tracking Error (Commonfund, 2016)
In this paper, Jess Gasper, PhD (Head of Asset Allocation and Research at Commonfund) discusses the concepts of active risk and tracking error and their impact on the investment decision-making process.

Embracing Downside Risk (AQR Capital Management, 2017)
AQR Capital Management examines equity index option pricing. They find that most of the empirical equity risk premium relates to compensation for taking on downside risk; therefore, downside risk is something to be embraced.

A Dynamic Approach to Managing Credit Risk (Nikko AM, Jan 2017)
Global economic, interest rate, and credit cycles are becoming out of sync. In this paper, the Global Credit Team at Nikko Asset Management introduce the firm’s default probability model for corporates.

Hedging equity risk with bonds: carry, not just correlation (Wellington, 2017)
During a crisis, when portfolio managers are lessening risk, cash flows from equities into bonds, thus offsetting equity losses.  Yet with yields currently near all-time lows, will they be able to offset the next equity downturn? 

Downside Protection - Methods and Horizons (Savvy Research, July 2017)
The best approach to downside protection depends on an investor's objectives, time-horizon, and liability profile (if any). Here is our list of the best papers.

A Framework for Generating Custom Multi-Asset Class Risk Models (Axioma, 2017)
What constitutes a standard multi-asset class (MAC) risk model? For it to be considered parsimonious, the model should contain the fewest possible risk factors, while maintaining the greatest level of explanatory power for the portfolio.

Tail Risk, Robust Portfolio Choice, and Asset Prices (2016)
This article solves the portfolio choice problem in a multi-asset incomplete market characterized by uncertain jump risk and possibly drastic tail events.

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