This post is slightly off topic. As part of the CAIA program, I was exposed to a paper -
Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors by Ashvin Chhabra. This article takes the traditional asset allocation format and adds a person's other assets such as real estate and pensions into the calculation. People are not only exposed to market risk. They have personal and aspirational risks. Some examples of personal risk are employment, health issues, age and how money is spent. Capital allocated to protect against personal risk is defensive in nature - being used to protect people's lifestyles. Market risk under Markowitz gives people risk-adjusted market returns and allows people to maintain their lifestyle. Aspirational risk is for people who want to enhance their lifestyle. Assets are categorized under each risk and allocations are made depending on the profile of the investor. Below are samples of each category:
- Personal - cash, Treasuries, annuities, homes, insurance and salary
- Market - equities, bonds, funds of funds and commodities
- Aspirational - employee stocks and options, hedge funds, private equity, mortgaged real estate and business ownership
Chhabra goes through an example of a portfolio with the traditional asset allocation and transforms it using the new rules.
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