Portfolio Optimization: Achieving Diversification and Low Volatility

Date: Tuesday, October 9, 2012
Author: ProHedge UK

Diversification is key to managing risk in uncertain climates. Fund of Funds will allocate capital across many different managers and strategies to reduce overall portfolio volatility. 

In this article PROHEDGE reviews a new white paper released by AlternativeSoft solutions, who utilize a Black-Litterman (BL) model to create efficient frontiers and optimal portfolios.
Many Portfolio optimization and construction tools rely exclusively on historical data to project future returns.

The BL model was developed to construct a portfolio not only based on a fund’s return data but the investor can also plug in their own views, information and projections into the model to add depth to the calculation. For example, within the AlternativeSoft suite of tools, users can insert their own views on an asset’s expected returns and their confidence. The results are portfolios with low volatility and high diversification.

The white paper goes on to build a number of portfolios using the BL model. The BL approach provides additional flexibility to traditional optimization methodology, producing diversified portfolios that are tailored to the enhanced information which an investor has. The paper also suggests that the techniques used can build portfolios with high skewness and low kurtosis and allows users to tilt portfolios away from equally weighted towards funds that investors are more certain will generate strong returns.

Click here to download the whitepaper.