Expected drawdown parity tackles tail risk
While portfolio construction approaches have become more scientific in past decades, most methods rely exclusively on historic data, but expected drawdown parity offers a new foundation, writes Chi Lee of GAM
Most approaches to portfolio construction are not well equipped to deal with tail risk, and at the same time they do not adequately compensate investors for the risk they take. A new methodology developed by GAM - expected drawdown parity (EDP) - seeks to address these two challenges. Combined with an intuitive analysis of correlations of return sources through the proprietary cluster map analysis, it provides a robust, forward-looking tool for portfolio construction.
No risk, no excess return
Ri
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