In our New Normal world, regime shifts in economic conditions will continue to cause significant challenges for risk management and portfolio construction.
On average, correlations across risk factors are lower than correlations across asset classes, and risk factor correlations tend to be more robust to regime shifts.
Risk factors provide a flexible language with which investors may express their forward-looking economic views, adapt to regime shifts and diversify their portfolios accordingly.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Investors and advisors that focus on these minor asset class risk factors to design a diversified portfolio are making a huge tactical error in my opinion. This kind of thinking is what got them side swiped so hard in 2008 for instance.
Last edited by craigr on Thu May 10, 2012 12:29 pm, edited 1 time in total.
If I even partly understood their argument then a simple single risk factor might be rising interest rates,
However I seem to recall from last year no one is even sure what the effect of this single risk factor would be on a simple portfolio like the PP.
I think they are suggesting that you should consider multiple complex risk factors against what your prediction of market state will be in the future and use this to derive your asset allocations ?
If they had provided example AAs mapped to risk factors mapped to a specific time period in the market, the I might have had more of chance of understanding it.
Unfortunately, the more specific implications of how you might use this methodology to evaluate the PP allocation in volatile markets completely escapes me.
I think it would be easier to learn to read tea leaves.
