History, Shocks and Drifts: A New Approach to Portfolio Formation

25 Pages Posted: 12 Mar 2021 Last revised: 7 May 2021

See all articles by Mark Kritzman

Mark Kritzman

Windham Capital Management

David Turkington

State Street Associates

Date Written: March 10, 2021

Abstract

Investors intuitively view future possibilities as a combination of historical outcomes, shocks that occur suddenly, and drifts that unfold gradually over several years. The authors show how to build portfolios based on such a view of the future. Their key innovation is to create a mixed-frequency return sample that properly balances short-term and long-term returns, and to form portfolios by considering all the returns of the sample instead of a statistical summary of them.

Keywords: Certainty equivalent, Drift, Expected utility, Full-scale optimization, Kinked utility function, Kurtosis, Log-wealth utility, Mean-variance analysis, Mixed-frequency return sample, Skewness, Shock, Sum of utilities Utility of sums

JEL Classification: C1, C10, C11, C13, C15, C18, G1, G11, G17

Suggested Citation

Kritzman, Mark and Turkington, David, History, Shocks and Drifts: A New Approach to Portfolio Formation (March 10, 2021). MIT Sloan Research Paper 6416-21, Available at SSRN: https://ssrn.com/abstract=3803431 or http://dx.doi.org/10.2139/ssrn.3803431

Mark Kritzman (Contact Author)

Windham Capital Management ( email )

800 Boylston Street
30th Floor
Boston, MA 02199
United States
6174193900 (Phone)
6172365034 (Fax)

David Turkington

State Street Associates ( email )

United States

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