Jay's Asset Allocation Blog

Blog about my off-hours work on the problem of Asset Allocation including but not limited to Portfolio Optimization algorithms, algorithms and approaches for improved estimation of Asset Allocation inputs and other potentially related items.

Thursday, September 30, 2010

More insight on Diversification or Lack There of

I recently came across this paper from the folks at PIMCO on diversification and how market regimes. Their thrust is that most assets have significant exposures to global equity factors. During low volatility regimes the returns due to this factor exposure get chalked up to manager expertise, but in fact it's just the unexpected equity factor. During stress regimes the exposure to this global equity factor causes correlations between assets to rise and diversification to fall just when it's needed most. I need some more time to parse it out a bit more, but it seems an interesting approach to the problem of increasing correlations between assets during stress regimes.