I have noticed your posts moving towards more quanty type stuff which I like
Quote from: melveyr on March 14, 2013, 11:56:15 PMI have noticed your posts moving towards more quanty type stuff which I like There's nothing like real money on the line to crystalize and clarify. Most people want to solve a problem and move on; I want to make sure there isn't going to be another one! I loathe the strategic PP because the risk is too high; only recently do I "see" the exact specifics.Anyway, I think that omitting cash for these "risk parity" allocations omits one of the economic environments. So what is a way to deal with it in lieu of duration? All I can think of is T-Bill futures.
Ag, I thiink you're confusing the two definitions of beta. It means both the traditional correlated volatility to an index that is standard in CAPM as well as the more recent definition for exposure to any asset's risk. I do not know why they conflated the two definitions in one term. Typical "ivory tower" academics, probably.
There's nothing engineered about the AWP other than they use leveraging and deleveraging to normalize the risk across all the asset classes relative to each other....The problem is I'm not quite convinced us mere mortals have the ability to delevarage gold, stocks and bonds and leverage up cash so all can meet in the sweet spot.
you can also look at a portfolios "risk allocation." To do this for each asset you look at the weighted beta of each asset in the portfolio. In this context, the individual assets beta is with respect to the total portfolio
Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with.
Quote from: melveyr on March 14, 2013, 11:56:15 PMyou can also look at a portfolios "risk allocation." To do this for each asset you look at the weighted beta of each asset in the portfolio. In this context, the individual assets beta is with respect to the total portfolioSee, there again is that beta as a substitute for risk...
But still, because of the ETFs bonanza of these times we can use ACs like emerging market debt, high yield, TIPs, commodities, all unavailable to us in HBs times. And I tested that they really reduce the portfolio volatility while improving its returns.
This is called “naïve” risk parity, as it is obviously an approximate derivation from the portfolio variance formula, but this is what is mostly used in practice. The idea is, to reallocate (or re-balance in PP parlance) on a periodic basis, but based on volatility and not just equal weights. Try to use volatile ACs, so you do not need leverage.
Now, HBPP achieves this implicitly. The 3 ACs in HBPP all have similar volatility. For instance, this is the reason he uses the long bond instead of the TNote, to match stocks and gold volatility. AWP just makes this allocation mechanism explicit.