Biz Direct MarketKnowing When To Make A Good Decision

Alpha beta separation? Beta based asset allocation is supposedly the main driver of returns. Many papers claim that it is almost all that matters. They reached that conclusion because asset allocation is what the chosen investors focused on. Despite many errors, that biased sample has dominated conventional wisdom for too long. Setting a stock/bond/alternatives mix may determine variability of returns for investors that emphasize it. It is easy to debunk the portfolio construction “axiom” if you seek reliable performance.

Suppose corporate pensions were required to invest 100% in its plan sponsor’s stock. Then we would conclude that security selection drove returns. Or assume investors flipped coins each month to determine whether to be 100% stocks or bonds. Tactical timing would be the only performance factor. In reality the best determinant of superior risk-adjusted returns is investment SKILL not the percentage in different UNSKILLED asset classes. If the “seminal” studies had confined their analysis to high frequency portfolios obviously they would find that ability at high frequency trading drives performance! Is it valuable information to “discover” that asset allocators’ returns largely depend on their asset allocation?

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