Ganesh Kumar

Portfolio Theory Vindicated

Normally I use past years returns to find correlations between Mutual Funds. For example a Global Bond Fund like LSGLX and Medial and Telecommunication Fund like PRMTX has low correlations with other mainstream stock funds. If I cannot use past years (I use returns from 1998) to determine correlations I am curious how is the QPP coming up with future correlation? We all by now know QPP uses Monte Carlo simulations, but they are just simulations using past data right?
The reason I ask this is I want to get to the bottom of how this works . We have all read Nasem Taleb's Black Swan and how "Value at Risk" simulations blew up on every one's face.
I also found one more contradictory statement in your article. You said
<Quote>"For the three years through 2005, the correlations between VEIEX, the Vanguard emerging market fund, and IVV was 76% (we couldn’t use EEM because it did not have three years of data at that time). The correlation between IVV and EFA was 83%. By contrast, the correlation between IVV and IDU, IXC, and IGE ranged from 46% (for IDU) to 60% (for IGE)."</Quote>
If Monte Carlo is always forward looking why do you have to look at correlation data of the past.
I also wonder If some one sets up a diversified portfolio of all asset classes you mentioned above and uses dollar cost averaging by investing in all classes periodically, whether a particular asset class underperforming for a period of time really matters. In other words I have started investing now in a small cap fund (RYVPX) using dollar cost averaging (Systematic Investment). I know small caps are going to underperform but I see this as a plus than a minus. Please comment on your thoughts on DOllar Cost Averaging and Portfolio Management.