Jim Richmond

Can You Trust Monte Carlo Models?

Geoff,

The paper you recommended, like the other papers you've published on your site, was a great read. Thanks for the link.

I'm still not with you that long term MCS models need "ticker" level portfolio parameterization, but now I understand what you're saying. I still think you're blurring the portfolio management problem with the retirement planning problem but reasonable men can differ.

On a related note, I definitely misunderstood you on the inclusion of macroeconomic factors into the model. I guess at the ticker level that would get messy very fast. I thought when you mentioned the need for including forward looking predictive inputs that you were talking about macroeconomic parameters. I now see that you mean predicting the future returns/std dev at the ticker level based on fundamental analysis.

Again, since this site is called seeking alpha I need to tread carefully, but my focus (for portfolio mgmt) has always been at the asset class level, rather than at the ticker level. That's a debate we probably shouldn't get into because I know that's like religion. I do think there's alpha to be had at the security level, I just don't think I can easily or reliably find it or pay someone to.

I'm of the school that the most likely place to find sustainable alpha is by including macroeconomic factors as inputs, along with historical risk/return/correlatio... data, and optimizing at the asset class level. Now I've never built such a model myself, but I've used several and the approach seems sensible to me. I follow the work by the folks at indexinvestor.com and I think they've done some good work here.

Anyhow, interesting discussion. Thanks again,

Jim