Mean-Variance Optimization

Private Equity and Mean-Variance Optimizaiton

2013-03-27 02:00:33
Marc Odo
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Occasionally we will get questions at Zephyr Associates about the viability of including private equity and/or venture capital (PE/VC) into a mean-variance optimization (MVO).  Ultimately it will be up to you whether or not you think it makes sense, but I am of the opinion that a simple, “naïve” allocation is a better approach than trying to optimize PE/VC into the efficient frontier.

Much of this has to do with the nature of the asset class itself.  Data for private equity is hard to come by, and what you cannot measure you cannot model.

Arithmetic vs. Geometric Mean Returns

2013-03-12 08:55:49
Marc Odo
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At Zephyr we occasionally get questions regarding returns in StyleADVISOR vs.

More information about this topic:

A Pragmatic Approach to the Efficient Frontier

2012-09-26 09:17:41
Marc Odo
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Harry Markowitz’s idea of creating “optimal” portfolios that maximize return and minimize risk has been with us for a very long time. For many people, the manifestation of the idea of “optimal” portfolios is the efficient frontier- those portfolios that by mathematical definition have the most return per level of risk or conversely the least amount of risk per level of return.

Mean-Variance Optimization

Given the inputs (returns, standard deviations, and correlations), AllocationADVISOR determines the applicable range of possible returns by finding the return of the minimum variance portfolio (MinVarReturn) and the return of the asset with the greatest expected return (MaxReturn). AllocationADVISOR’s optimizer finds the combination of assets that minimizes the risk for each of 100 return points within this range. Thus, the efficient frontier is made up of 100 efficient portfolios.

 
 

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