SEBA Finance Professors Present Findings on Constructing and Balancing Investor Portfolios
SEBA professor Jivendra Kale was invited to give a presentation to the Quantitative Work Alliance for Applied Financial Education and Wisdom, the quant group for investment professionals and academics in San Francisco. Professionals from Mellon Bank, Financial Engines, Quantal, Schwab, MSCI-Barra, AXA Rosenberg, Nuveen Investments and other financial institutions attended, and the presentation was very well received. Professor Kale made the same presentation to the Global Association of Risk Professionals and the CFA Society of San Francisco on March 13, and once again the presentation was well attended and well received.
The presentation was based on a research paper professor Kale co-authored with professor Arnav Sheth, titled "Power-Log Portfolio Optimization for Controlling Tail Risk and Maximizing Portfolio Growth." Kale discussed a portfolio selection method based on Power-Log utility functions, which combine the tenets of behavioral finance with multi-period portfolio theory to represent investor preferences in a way that is more representative of investor goals than other methods. The empirical research presented, demonstrated the optimization method's effectiveness in producing investment portfolios with lower downside risk and higher growth than the standard Markowitz mean-variance method of constructing portfolios. Surprisingly, the optimal Power-Log portfolios also had lower standard deviation of return than mean-variance efficient portfolios, even though mean-variance efficient portfolios are designed to have the lowest standard deviation of return for a given expected return. The optimal Power-Log portfolios also provided much better downside protection against large negative surprises, such as the market downturns in 2002 and 2008.
Given the strong empirical results, and the fact that Power-Log optimization works for portfolios containing all types of assets such as stocks, bonds, options, ETF's and hedge funds, it has the potential to replace mean-variance optimization as the standard method of portfolio construction. In other words, investment professionals now have a tool for constructing and balancing investor portfolios that is far more effective for meeting investor goals than tools that have been available so far.
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Founded in 1863, Saint Mary’s College of California is a cornerstone institution of the San Francisco bay area. After nearly 150 years, with a network of more than 40,000 alumni worldwide, Saint Mary’s tradition of educational excellence is stronger than ever. Saint Mary's School of Economics and Business Administration is grounded in this same rich history and tradition of excellence. With a focus on global perspective and responsible business, all of our five distinct graduate business degree programs are designed for working professionals who seek the knowledge and skills needed to accelerate their careers. Small class sizes facilitate collaboration, accessibility, and engaging discussions with our distinguished faculty, and an interactive learning environment focused on practical business knowledge, serves to provide our students with the maximum return on their investment.