Robust Near-Optimal Portfolio Construction - Ortec Finance

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Robust Near-OptimalPortfolio ConstructionUse case4-stepsapproachApplicationsIntroductionLearn about smart algorithms to support robustinvestment portfolio constructing with quantitativeand qualitative input1

IntroductionGoal: constructing a realistic portfolio that is within the risk budget and robust for the assumptions madeNear-optimal optimization is a smart technique that enables you to find these portfolios in an efficient wayIt generates multiple asset allocations with a similar risk-return profileThe near-optimal portfolios are robust to changes in economic assumptionsIt enables to incorporate quantitative and qualitative input in the ultimate portfolio construction processRobust Near-Optimal Portfolio ConstructionUse case2

4-steps approach1. Define the risk budget2. Find all portfolios within the risk budget3. Incorporate qualitative arguments4. Construct a robust investment portfolioRobust Near-Optimal Portfolio ConstructionUse case3

4-steps approach1. Define the risk budgetSolvency ratio (average)Reflected by a relevant risk metric and horizon tailored to your organizationEfficientfrontierSolvency ratio (5% worst case)Example risk metrics for this use case: expected 1-year solvency ratio and the average1-year loss in the 5% worst case solvency ratio scenariosGrey area: risk budgetRobust Near-Optimal Portfolio ConstructionUse case4

4-steps approach2. Find all portfolios within the risk budgetApply the innovative Ortec Finance optimization techniques and let smart algorithmsfind all ‘near optimal’ portfolios within the risk budget(average)ratio (average)SolvencySolvencyFundingratioEfficient frontier and near-optimal areaNear-optimal ncyratio(5%worstcase)Near-optimal portfolios show similar risk and return characteristics for multiple assetallocationsRobust Near-Optimal Portfolio ConstructionUse case5

4-steps approach3. Incorporate qualitative argumentsIncorporate qualitative arguments such as ESG criteria, transaction costs, marketviews, and combine this with the robust quantitative asset allocation insights tofacilitate discussions with your investment committee(average)ratio (average)SolvencySolvencyFundingratioEfficient frontier and near-optimal areaNear-optimal ncyratio(5%worstcase)This example: High Yield credits are not preferred for due to a low ESG score of the currentmandateRobust Near-Optimal Portfolio ConstructionUse case6

4-steps approach4. Construct a robust investment portfolioIn construction, use a combination of (weighted) near-optimal portfolios thatsatisfies the risk budget and incorporates qualitative criteriaOPT3578A risk decomposition shows higher diversification benefits for portfolios 3, 5 and 7Robust Near-Optimal Portfolio ConstructionUse case7

4-steps approach4. Construct a robust investment portfolioIn construction, use a combination of (weighted) near-optimal portfolios thatsatisfies the risk budget and incorporates qualitative criteria(average)ratio (average)Solvency ratioSolvencyEfficient frontier and near-optimal areaEfficientEfficientfrontierfrontierNear-optimal portfoliosNear-optimal portfoliosGov. bondsCorp. bonds IGCorp. bonds HYCashEquity Dev. M.Equity EM M.Private EquityReal EstateSolvencySolvency ratioratio (5%(5% worstworst case)case)The candidate portfolio is a weighted combination of near-optimal portfolios 3, 5 and 7This portfolio is a realistic portfolio that is near optimal and within the risk budgetRobust Near-Optimal Portfolio ConstructionUse case8

ApplicationsImprove the riskadjusted return of theannual investment plan(robust portfolioconstruction)Robust Near-Optimal Portfolio ConstructionUse case9Facilitate thediscussion and align allstakeholders in theinvestment decisionprocessAvoid unnecessarytransaction costs

Learn moreLearn more about the underlying robust optimization technique with the technical paperRead paperRobust Near-Optimal Portfolio ConstructionUse case10

For more information, please contactAbout Ortec FinanceOrtec Finance is the leading provider of technologyand solutions for risk and return management.It is Ortec Finance’s purpose to enable people tomanage the complexity of investment decisions. Wedo this through delivering leading technologies andsolutions for investment decision making to financialinstitutions around the world. Our strength lies in aneffective combination of advanced models, innovativetechnology and in-depth market knowledge.Headquartered in Rotterdam, Ortec Finance has officesAmsterdam, London, Toronto, Zurich and in Hong Kong.John KuijtConsultantTessa KuijlSenior lead ortec-finance.com 20 countries represented500 customers96% retention rate3 trillion euro total assets managed by our clients.We enable people to manage the complexity of investment decision making11

The candidate portfolio is a weighted combination of near-optimal portfolios 3, 5 and 7 This portfolio is a realistic portfolio that is near optimal and within the risk budget Near-optimal portfolios Gov. bonds Corp. bonds IG Corp. bonds HY Cash Equity Dev. M. Equity EM M. Private Equity Real Estate Robust Near-Optimal Portfolio Construction .

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