Morningstar EnCorr Resampling Mean Variance...
Transcript of Morningstar EnCorr Resampling Mean Variance...
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Morningstar EnCorr
Resampling Mean Variance Optimization
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EnCorr Modules
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Overview
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Traditional Mean Variance Optimization (Asset Only)×
Liability-Modeling Mean Variance Optimization (Asset and Liabilities)
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Resampling Mean Variance Optimization
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Resampling Mean Variance Optimization×
Resampling is a combination of the Base Case Optimization (traditional MVO) and Monte Carlo Simulations.
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Resampling recognizes that Capital Market Assumptions are forecasts and not a “sure thing”. Therefore, there is no “certainty”
to lead to highly concentrated portfolios.
• Result: resampling produces more diversified and robust portfolios.
Overview
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Methodology
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Big Picture
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Methodology
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Simulation Process Summary1.
Form Inputs2.
Draw random sample based on inputs3.
Compute means, standard deviation, and correlations4.
Run MVO based on sample statistics to create simulated efficient frontiers
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Repeat Steps 2 to 4 based on your number of simulation settings
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Resampled Frontiers Summary×
Portfolios are then selected from these simulated frontiers and sorted into bins by their standard deviation.
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The portfolios in each bin are then averaged to generate the resampled efficient portfolio.
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The resampled efficient frontier is based on these resampled portfolios.
Methodology
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Methodology
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Settings×
Number of simulations (250) ×
Number of points taken from simulated frontiers (200) ×
Number of periods of simulated data (50)×
Number of bins in resampled frontiers (50)
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Each set of simulated Capital Market Assumptions results in one simulate MVO efficient frontier
Methodology
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Repeatedly generate simulate Capital Market Assumptions, each time generating a simulate MVO efficient frontier
Methodology
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Repeatedly generate simulate Capital Market Assumptions, each time generating a simulate MVO efficient frontier
Methodology
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Each dot represents an asset allocation based on simulated Capital Market Assumptions
Methodology
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With in each bin, the asset allocations are averaged to determine the average asset allocation of that bin
Methodology
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The resampled frontier is created by connecting the average asset allocation of the bins
Methodology
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Results
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Base Case vs. Resampled Case Optimization
Standard Deviation (%)
WeightsTraditional MVO
0.0%
100.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
0.59 3.18 5.76 8.35 10.94 13.53 16.12 18.70 21.29 23.88 26.47
Large Cap Growth Large Cap Value Mid Cap Equities Small Cap Equities Intl EquitiesEmerging Markets REITs Long Term Bonds Intermediate Term Bonds High Yield BondsMunicipal Bonds Cash
Standard Deviation (%)
WeightsResampled MVO
0.0%
100.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
0.59 3.18 5.76 8.35 10.94 13.53 16.12 18.70 21.29 23.88 26.47
Large Cap Growth Large Cap Value Mid Cap Equities Small Cap Equities Intl EquitiesEmerging Markets REITs Long Term Bonds Intermediate Term Bonds High Yield BondsMunicipal Bonds Cash
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Results
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Random Seed
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