In every crisis lies the seed of opportunity.  We do so with an analytically rigorous approach. We construct 5 possible scenarios ranging from the most optimistic outcome that there will soon be a trade deal, to the other less pleasant end of the spectrum. Each scenario is constructed from a series of inter-related events to create a reasonable market outlook.

We start by assigning equal probability to each scenario, 30% to the more likely ones and 10% to the less likely ones. Each scenario is represented by a set of market factors reflecting the possible shocks under each scenario. Finally, we derive the return distribution of a portfolio from the distributions of market factors. Investors can adjust each factor shock and probability as they see fit, and let our platform come up with unique, fully-customized and analytically rigorous recommendations to their portfolios.

Drivers to Outperformance

We agree with Fischer Black’s Financial Analysts Journal (Volume 49, 1993 – Issue 5) article that estimating expected return is a hard problem, but estimating distribution can be done more reliably with proven techniques.  Unlike traditional approaches focusing on a single scenario with excessively rosy predictions on the upside while ignoring the downside, we offer significant improvements based on our research on a wide spectrum of probabilistic events, say P(r1, r2, r3, r4).  Once we have derived a description of the probability distribution of the value of P based on what we know about the distributions of r1, r2, r3, r4, we can then make specific recommendations on how the outcomes can be improved on most if not all probabilistic scenarios.  This is a significant improvement over the traditional strategy of optimizing against a single scenario, which often results in excessively rosy upside estimates (as pointed out by Treynor-Black) but ignores downside outcomes.

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