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Abstract
Investment fund investment strategies and asset allocations typically are based on a multiplicity of complex (possibly competing) goals that often are incorporated in a simple return target. The challenge is to develop a portfolio whose expected return at least equals the target but has a volatility less than a disaster-avoidance risk limit. However, such a goal-matching return only provides a 50/50 chance of success. Truly important goals may require a higher probability of success, such as 60%. This article focuses on efficient portfolios and the return they can provide with a specified probability of assurance. The key step is to map the efficient frontier into an assurance frontier that plots risk-adjusted returns with a 60% success probability. This frontier typically has a peak return that is the highest available risk-adjusted return. In some cases, this peak portfolio is at the risk limit. In other cases, even with a monotonically rising efficient frontier, the peak may fall well below the maximum volatility limit.
Key Findings
▪ Portfolios with expected returns that just match a goal-based target may have only a 50/50 assurance of success (even after those targets have been properly revised to account for, e.g., inflation, fund expenses, and geometric effects).
▪ Portfolios that have the best risk-adjusted return can sometimes be found at a volatility that is well short of a fund’s maximum risk limit.
▪ Longer horizons generally lead to higher peak returns that can enhance prospects of success.
- © 2021 Pageant Media Ltd
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600