Optimization and portfolio selection 165
7.2.2 Optimize or measure performance
The model now allows the user to use the optimizer in a mean – variance mode
or a mean – downside risk mode, or to view performance measurement in sev-
eral modes. Figure 7.5 shows the screen for the asset allocation choice for a
defined contribution plan and an 8% DTR ™* portfolio (Moderate). We allow
a mean – variance as well as a mean – downside risk choice because we wanted to
be able to compare our mean – variance result with the output from a standard
mean – variance optimizer. If we did not get very similar results, it would call
into question our methodology for generating joint distributions.
Figure 7.5 shows the efficient frontier in upside potential to downside risk
space. The letter M is approximately where the moderate portfolio is located.
The user can scroll to that approximate location and see the results to the right
of the efficient frontier. The asset allocation is shown in the lower statistics
table titled “ Portfolio Style. ” Forty-two percent is allocated to the nine US
equity styles identified by Ron Surz, president of PPCS-inc. Nothing is allo-
cated to Japan because we shifted the mean down from 15% to 6% without
making any adjustments to the other indexes. This would not prevent a mean –
variance optimizer from assigning some weight to Japan if it was less than
perfectly positively correlated with the other indexes.
Figure 7.4 Efficient Frontier.
- DTR is a trademark of Sortino Investment Advisors.