Expected Returns Independent Allocations
15 Pages Posted: 29 Jul 2015
Date Written: March 2012
Abstract
Present market instabilities have prompted great interest on the characteristics of specific portfolios such as minimum variance and equally- weighted risk contribution portfolios as these portfolios do not rely on the estimate of expected returns. Indeed, in turmoil periods traditional market co occurrences and market dependencies, underlying qualitative analysts' expectations on market directionality, are perturbed. As a consequence it is extremely difficult to rely on past average returns or to formulate future return expectations as required to construct efficient portfolios in a traditional portfolio optimization problem.
Our objective here is to foster educated intuition by determining a set of simple rules characterising portfolios based on Expected Return Independent Allocations (E.R.I.A. in the sequel). The general case of portfolio optimization embedding qualitative views has been addressed in a dedicated note
Keywords: Risk Based Allocation, Equally Risk Weighted Portfolios, ERC, Diversification, Expected Returns, Robust Allocation
JEL Classification: A00, C00, G11, A10, C11, G00, B11, C70, G14, C73, C61, C60, C15
Suggested Citation: Suggested Citation