Major Asset Classes October 2021 Risk Profile
James Picerno | Nov 03, 2021 07:27AM ET
It had to end eventually. The recent run higher in the Sharpe ratio for the Global Market Index (GMI) finally reversed in October. The decline marks the first time in eight months that this popular risk metric eased for GMI, an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash).
GMI’s Sharpe ratio dipped to 0.95 last month after reaching a two-year peak in the previous month. The calculation is based on an annualized rolling 10-year window via monthly data and assumes a zero-percent risk-free rate throughout.
Risk-adjusted performance has slipped, but GMI’s rebound in October lifted it to a new record high. Accordingly, the index’s drawdown returned to zero last month, where it’s been for much of 2021.
GMI represents a theoretical benchmark for the “optimal” portfolio. Using standard finance theory as a guide, this portfolio is considered a preferred strategy for the average investor with an infinite time horizon.
Those assumptions are, of course, unrealistic in the real world. Nonetheless, GMI is useful as a baseline to begin research on asset allocation and portfolio design. GMI’s history suggests that this benchmark’s performance is competitive with active asset-allocation strategies overall, especially after adjusting for risk, trading costs, and taxes.
For added context, readers can use this basic risk profile for GMI alongside the current monthly updates on performance and expected return for the benchmark and its components.
The table below presents additional risk metrics for GMI and its underlying asset classes, based on a trailing 10-year window through last month.
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Here are brief definitions of each risk metric:
- Volatility: annualized standard deviation of monthly return
- Sharpe ratio: ratio of monthly returns/monthly volatility (risk-free rate is assumed to be zero)
- Sortino ratio: excess performance of downside semi-variance (assuming 0% threshold target)
- Ulcer Index: duration of drawdowns by selecting negative return for each period below the previous peak or high water mark
- Maximum Drawdown: the deepest peak-to-trough decline
- Beta: measure of volatility relative to a benchmark (in this case GMI)
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