BO113: Asset Allocation Using Correlations

Top Traders Unplugged

Niels Kaastrup-Larsen

Business, Business News, Investing, News

4.8 • 670 Ratings

🗓️ 6 July 2020

⏱️ 5 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

How to allocate a portfolio, accounting for market correlations?

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Transcript

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0:00.0	This goes a little bit about asset allocation or portfolio construction.
0:07.0	And the question goes like this.
0:09.0	Let's say I want to construct a simple portfolio using four asset classes, equities, bonds, reeds and commodities.
0:15.0	From there, I can either deploy my cash by using a naive 1 over N allocation, 25% on each, or by using a risk parity approach by sizing
0:23.8	based on volatility. In other words, allocating more to low-val assets, less to high-vol
0:28.8	assets, may be rebalancing at some point in time so that in the end I keep about the same unit
0:34.1	of risk-perposition. Classic stuff here.
0:37.7	The next level would be to introduce correlation matrix
0:40.6	between the four asset classes.
0:42.2	If, for example, equities and reeds are highly correlated,
0:46.9	then maybe I should allocate less on both.
0:50.2	So I always wonder if CTAs use these correlation matrices
0:54.1	and if yes, how.
0:58.0	Your opinions, please.
1:01.4	Yes, definitely use that.
1:03.6	Looking at correlation and that plays an important role in portfolio construction.
1:08.2	I think the question is, do you have a, like, is that changing all the
1:12.8	time? So what I mean with that is, do you continue to calculate correlations over different time
1:19.2	periods every day? And as a result of that, change your next position size, because, you know,
1:26.2	maybe correlations have gone up in the past, say,
1:28.3	20 days or 100 days, and that causes you to take a smaller position the next time you get a signal.
1:35.9	Or do you have a more static approach, like a static correlation matrix where you say,
	...

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