In Zephyr StyleADVISOR 8.5 release, the ability to add or remove fees from a return series has been added. This article on fee adjustments explains the precise meaning of these parameters and the math that Zephyr StyleADVISOR uses to modify a return series if a fee adjustment has been requested. 

Our resident mathematician, David Kirkman, has written an in depth article on our two new statistics, Value at Risk and Conditional Value at Risk. Zephyr is introducting these two statistics in StyleADVISOR 8.4.

One of the most frequently used terms in finance is “alpha”. Alpha is referenced so widely and in so many different contexts that confusion about exactly what people mean when they use it is inevitable. This paper seeks to clarify and explain what alpha is and is not, and to differentiate between all of the variations on the basic concept of such a common statistic.

With the new Financial Services Authority (FSA) directive known as the Retail Distribution Review
(RDR) set to come on-line December 31st, 2012, many are wondering what the impact will be on the landscape for providing financial advice in the United Kingdom. This piece seeks to ask questions and provide answers regarding the practical, real-world implications of the RDR.

Recent market events like the dot-com bust the credit crunch have increased the awareness of “tail events”, i.e. rare, but extreme and traumatic market environments. Skewness and kurtosis are the traditional ways one would measure the impact of extreme market conditions upon a distribution of returns. Although well-established in statistical theory, skewness and kurtosis are often ignored or misunderstood in performance analysis. This paper seeks to give the reader useful definitions and a working knowledge of skewness and kurtosis.

In July of 2006, Zephyr Associates unveiled a new risk metric called the “pain index”. The pain index is meant to quantify the capital preservation characteristics of a fund, manager, index, or any other data series. In short, the pain index measures the 1) depth, 2) duration, and 3) frequency of losses experienced by a manager. Once established, the pain index can be utilized in a return vs. risk trade-off metric. The “pain ratio” compares the returns versus the loss characteristics using a well-known format.

In Spring of 2010, Zephyr Associates put forth the idea of using William Sharpe’s returns-based style analysis (RBSA) methodology as a valuable tool for analyzing target date funds.  While spelling out the case for using RBSA from an academic, theoretical perspective, Zephyr clients have since requested guidance in using the idea proposed in a real-world setting to compare the performances of two families of target date funds.   This follow-up paper illustrates how the analyst might use the RBSA ideas to these ends.

This guide will walk you through the steps and rationale for using Zephyr’s AllocationADVISOR to optimize a collection of active managers. The optimization is a variation of Markowitz’s classic concept of Mean-Variance Optimization and the efficient frontier.

This guide will walk you through the steps and rationale for using Zephyr’s AllocationADVISOR’s “Confidence Bands” function.  In short, a Confidence Bands analysis runs a full Monte Carlo analysis for every single portfolio on the efficient frontier and tells the analyst which portfolios have the highest probability of meeting an investor’s goals.

The Omega measure was introduced in 2002 by C. Keating and B. Sedgewick ([1]) as a universal performance measure. This article explains the use, the meaning, and the exact mathematical definition of the Omega.

Black-Litterman: Asset allocations you can actually use!
Have you given up on mean variance optimization because the resulting asset allocations are unintuitive and anything but diversified? The sophisticated Black-Litterman asset allocation model helps you realize the benefits of mean variance optimization by creating portfolios that you can use.

How does the Black-Litterman Model Calculate Return Forecasts?
The Black-Litterman model uses two sophisticated mathematical techniques to create forecasts for mean variance optimization: reverse optimization and Bayesian probability theory. This article is a "user-friendly" explanation of these techniques.

Home Prices in StyleADVISOR
You can't pick up a newspaper today without reading about the boom in single family home prices. Home owners will soon be able to hedge their real estate exposure when the Chicago Mercantile Exchange begins trading derivatives on home prices. Now you can analyze home prices in StyleADVISOR with our new home price database

One of the most frequently asked questions concerning the mathematics of StyleADVISOR is how exactly we calculate the style attribution coefficients which are displayed in the style map view, the asset allocation view, and the style table. The short answer to this question is very easy: We perform the returns-based style analysis that was invented by Stanford professor and Nobel laureate William F. Sharpe. In this article, I will explain the mathematics of Sharpe's algorithm. As it turns out, a fairly complete and mathematically rigorous description of the algorithm can be given without using a lot of mathematical formalism.

We recently completed an analysis of a large defined contribution program. The plan sponsor wanted to use StyleADVISOR to make changes in the structure. The results may be helpful to you whether you are a plan sponsor, consultant or money manager.

The goal of this project is to illustrate a technique that can be used by StyleADVISOR/AllocationADVISOR users for going through a large database of managers to create superior performing portfolios. This process starts by putting all managers onto a level playing field and finishes by allocating among the finalists to create the “most efficient” portfolios from those determined to be “most skillful.” By using the power of the computer the user is able to quickly search through a database of thousands of managers and discover many that would otherwise have been overlooked using more traditional due diligence research techniques.

StyleADVISOR is used at a number of universities (Stanford, Wharton, London Business School, Northwestern, etc.). This nineteen page report is a tutorial on style analysis written by Professor Ravi Jagannathan from the Kellogg Graduate School of Business, Northwestern University. This is an excellent primer on style analysis.

Also presented at our 2001 User's Conference this article looks at how daily data can be used for style and sector monitoring of any manager where daily returns are available.

Gerald W. Buetow and Hal Ratner in their recent article, "The Dangers in Using Returns-Based Style Analysis in Asset Allocation," have amply demonstrated the dangers of blaming a poorly understood and poorly used tool. We will analyze the six funds that Buetow and Ratner did, show where they went wrong in their analyses, and demonstrate that returns based style analysis, when done properly, provides accurate results. First we will list B&R's conclusions, then show why, with proper analysis, their conclusions are wrong.

Because of our superior methodology, investment professionals are using Zephyr Universes for peer group analysis. This newsletter discusses the Zephyr Universes in detail, including our new domestic fixed income universes, our methodology for the domestic equity universes, how to create your own universes and much more. Also, a further exploration into Monte Carlo simulation, Dr. Becker's Math Corner, information about online training and much more.

Included in this newsletter are the enhancements made to the latest version of StyleADVISOR including an explanation of the all new custom axis graph and we take a look at the new macro recording tool for changing parameters such as symbols throughout a workbook. Also included is an analysis of detecting a manager's sector changes using daily data and the all new Zephyr WebANALYTICS.