Beta Hog

In Search of Low (or Negative) Correlation Between Asset Returns

Geoff ... I am reasonably confident that your points concerning the utility of Monte Carlo for portfolio PLANNING purposes are valid ... and not here in question or doubt. But my previous query (which see above) was not about portfolio DESIGN (i.e the Strategic Asset Allocation, or the Benchmark posture for the portfolio) ... rather, the question was whether Monte Carlo is of any practical value in the "active" ongoing management of the portfolio after it's architecture has been decided ... in other words, is it useful for Tactical Asset Allocation once the SAA has been selected? Since it is self-evident that market activity alone WILL alter the alter the initial SAA with the passage of time, your comments on the TAA aspect of the matter would be appreciated.

In Search of Low (or Negative) Correlation Between Asset Returns

I am not familiar enough with Monte Carlo analysis to be able to determine whether it has enough practical value to warrant use as an ongoing investment tool. Based on postings by Geoff Considine, I suspect it may have value in portfolio design, as an initial step. I regard portfolio design (i.e. the 'strategic' posture, or SAA, that results from the investor's 'investment policy') as the single most important determinant of investment success. Once the SAA posture is decided (by whatever means) a 'tactical' dimension (or TAA) is required for the inevitable re-balancing that all portfolios require through time. If this 'tactical' element is ignored, the markets most certainly WILL adjust the balance by default). This is the critical deficiency of the so-called "passive" investment approach (apologies to John Bogle) which doesn't adequately deal with the matter since all markets function on a dynamic continuum and therefore require an "active" response. It would be interesting to see whether Monte Carlo has any useful elements at the TAA level. Have you done any work in this area? Or perhaps Mr. Considine could comment if he chances to read this ?

In Search of Low (or Negative) Correlation Between Asset Returns

Your philosophical inference concerning "forward-looking information" is quite correct in that it is a pre-judgement of the anticipated future. And it will almost certainly prove to be "wrong" in some measure. And if it isn't wrong, that will be pure "luck" and nothing more. All 'forward-looking data' carries probalistic uncertainty of some amount that cannot be quantified in advance with a high degree of precision. Such forward inputs are based on an extension of the past in any event since they are not usually conceived in a vacuum. The strength of using only historical numbers is that they are not open to dispute. Statements that past returns can not be used to generate superior risk-adjusted future returns are not a proof of anything, but merely represent the 'opinion' of the person making the claim.