Monte Carlo / RSF / BL /MVO

Anyone want to help make a thread that comprehensively compares these? Reference exams if you can. I’ll start:

2008 Exam:

RSF produces portfolios that are 1) more stable (less rebalancing) and 2) more diversified (not overly optimized)

REF: Resampled Eff. Frontier: Same referenced in 2011 - Colleen Finnegan case (with examples from the case)

Dissatisfied with the amount of rebalancing required and Amount of transaction costs incurred- More Stable portfolios produced will result in less rebalancing therefore fewer transaction costs.

Stable more diversified portfolio - below average risk tolerance - this portfolio will satisfy Finnegan’s needs better.

Black Litterman:

Allows imposing Investor Views [Finnegan 2011]

[Continues to maintain positive view on many firms in the european textile sector and would like to incorporate those views in her investment strategy]

Produces more diversified portfolios

this was on 2011 AM - i am betting this isnt tested again this year…but then again, what do i know

MVO: may not be adaquately diversified Asset allocation recommendations are highly sensitive to small changes in teh inputs, particular expected return estimates

Resampled:Derived from a set of average asset weights each optimal for a particular return history that is created via random sampling. Typically more stable, better divs., yet lacks theoretical underpinning and relies on historical data.

The Holy Grail… da da… Black Litterman: Starts with asset class weitghts derived from a global benchmark, those weights are tweeked by portfolio manager’s capital market exectations. If the manager maintains the weight of the global index, it means that they do not have a particular feeling (for or against) an overweight decision. Result: greater consistency, better divs portfolio, allows for investors’s tweeks. Criticisms are based on human misuse. Combine this bad boy with monte carlo and you have something glorious!

Nice. Thanks guys.

And who knows. If it has been on 2-3 of the last 6 exams, seems like a popular topic.

Monte Carlo,

Run the scenarios to determien teh terminal wealt of the investor.

Flexible and can be used to deduce after tax terminal wealth

From Monte Carlo would be able to tell the probability of the investor reaching their target ( remember that grapjh in the EOC with the mediamn investor portfolio value and the 95th percentile portfolio value

Monte Carlo can take into account taxes, changing circumstances (path dependent), and cap mkt expectations