http://allaboutalpha.com/blog/2007/01/23/the-whole-enchilada/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Fri, 19 Mar 2010 07:52:26 +0000 http://wordpress.org/?v=abc hourly 1 http://allaboutalpha.com/blog/2007/01/23/the-whole-enchilada/comment-page-1/#comment-88737 Rajiv Sethia Wed, 05 Mar 2008 08:16:25 +0000 http://allaboutalpha.com/blog/2007/01/23/the-whole-enchilada/#comment-88737 The URL to Dalio's paper has changed (the link above does not work), here is the new link: http://www.bwater.com/Uploads/FileManager/In_the_News/engineering_targeted_returns_and_risks_pmpt_060215.pdf The URL to Dalio’s paper has changed (the link above does not work), here is the new link:
http://www.bwater.com/Uploads/FileManager/In_the_News/engineering_targeted_returns_and_risks_pmpt_060215.pdf

]]> http://allaboutalpha.com/blog/2007/01/23/the-whole-enchilada/comment-page-1/#comment-88735 Rajiv Sethia Wed, 05 Mar 2008 08:13:44 +0000 http://allaboutalpha.com/blog/2007/01/23/the-whole-enchilada/#comment-88735 If one digs deeper into the argument about leveraging and deleveraging for the beta portfolio, it doesn't seem to make any sense. All that Dalio is doing is moving the asset classes up and down the capital markets line before combining them into his efficient beta portfolio. ie the Sharpe ratio does not change for any of the asset classes. This levering up and down of asset classes does not change the correlation between them. So how will this bring about any additional diversification? I don't think it can. In other words, whether you first lever up or lever down individual asset classes and then combine them into an efficient portfolio; or you first combine them into an optimized portfolio and then lever the whole portfolio up or down, you get the same result. Unless you are assuming that there are entire asset classes that lie way off the capital markets line. If one digs deeper into the argument about leveraging and deleveraging for the beta portfolio, it doesn’t seem to make any sense. All that Dalio is doing is moving the asset classes up and down the capital markets line before combining them into his efficient beta portfolio. ie the Sharpe ratio does not change for any of the asset classes. This levering up and down of asset classes does not change the correlation between them. So how will this bring about any additional diversification? I don’t think it can. In other words, whether you first lever up or lever down individual asset classes and then combine them into an efficient portfolio; or you first combine them into an optimized portfolio and then lever the whole portfolio up or down, you get the same result. Unless you are assuming that there are entire asset classes that lie way off the capital markets line.

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