NO.PZ202212280100002101
问题如下:
A. Explain,
compared to the standard MVO process, and based on Finnegan’s circumstances:
i. two advantages of using a resampled efficient
frontier.
ii. one advantage of using the Black-Litterman approach.
iii. two advantages of using a Monte Carlo simulation.
选项:
解释:
i. Advantages of using a resampled efficient frontier:
The resampled efficient frontier approach generates portfolios that are more stable through time than those derived using standard mean-variance optimization (MVO). Finnegan stated that she was dissatisfied with the high level of turnover and transaction costs she incurred in her portfolio using standard MVO. A portfolio that is more stable would reduce turnover and transaction costs, and be more appropriate for Finnegan.
The resampled efficient frontier approach generates portfolios that are more diversified than those derived using standard MVO. Finnegan stated that she has below-average risk tolerance until she finds a new job. A more diversified portfolio should be less volatile, meeting Finnegan’s lower risk tolerance requirement.
ii. Advantages of using the Black-Litterman approach:
The Black-Litterman (BL) approach incorporates the investor’s views. Finnegan has a positive view of the European retail clothing sector. The BL approach allows her to incorporate these views, while standard MVO does not.
The BL approach generates portfolios that are more diversified than those derived using standard MVO. Finnegan stated that she has below-average risk tolerance until she finds a new job. A more diversified portfolio should be less volatile, meeting Finnegan’s lower risk tolerance requirement.
iii. Advantages of using a Monte-Carlo simulation:
Monte Carlo simulations allow for portfolio rebalancing under changing tax rates and in multi-period situations. Finnegan’s effective tax rate will likely increase sharply when she starts a new job. MVO does not consider these factors.
Monte Carlo simulations can compute path-dependent terminal wealth. Finnegan hopes to make a deposit on a home for her sister within the year, provided she finds a new job. Cash flows in and out of a portfolio and the sequence of returns will have a material effect on terminal wealth – this is termed path-dependent. In Finnegan’s case, the deposit would be a significant cash outflow, resulting in lower terminal wealth.
a) resampled efficient frontier: 1) The first advantage is that resampled efficient frontier can generate stable asset allocation over time. By having stable asset allocation, Finnegan can solve her dissatisfaction with high frequency of rebalancing and high transaction costs. 2) The second advantage is that resampled efficient frontier can generate more diversified asset allocation. By having diversified asset allocation, Finnegan can reduce the volatility and risk of her portfolio, thus matching with her below average risk tolerance.
b) Black-Litterman approach: One advantage is that Finnegan can incorporate her own perspective in asset allocation by using this approach. Because she would like to incorporate her positive view on European clothing retailers into her investment strategy, Black-Litterman approach is a better option.
c) Monte Carlo simulation: 1) Monte Carlo simulation takes factors such as tax rate changes and multiple time period into consideration. Because Finnegan's efficient tax rate will increase significantly when she finds a new job, Monte Carlo simulation is more appropriate. 2) Monte Carlo simulation can solve the problem of path dependency by considering all possible outcomes of asset allocation. Because Finnegan states that if she starts a new job within the year, she may make a deposit on a home, the terminal value of her portfolio is likely to be impacted by the cash in and outflow. Thus, she needs Monte Carlo simulation to solve the path dependency problem.