Most investors agree that highest expected returns of traditional asset classes can be found in the equity markets. However, only few investors put all their money on the stock market as volatility and the risk to suffer from losses is perceived as too high.
To reduce risk, parts of the portfolio are allocated into fixed income assets. Due to the substantial decline in yields, the "cost" of holding fixed income investments for diversification purposes however, has dramatically increased in recent years – and with this the opportunity cost of diversification amongst asset classes.
As a result, investors aim at increasing their exposure in equities – without the willingness to accept a higher level of downside risk. To improve the trade-off between risk and return, systematic hedging strategies may allow designing asymmetric risk-return-profiles in order to re-allocate assets into equities whilst limiting the downside risk through additional convexity (downside protection).
Speaker Niklas Loer will focus on the following aspects:
- Application of close-to-reality (non-parametric, stochastic) market models to estimate a portfolio's risk-return-profile from a buy-side perspective
- How to measure and allocate the cost of convexity versus the cost of asset class diversification
- Comparing the characteristics of symmetric and asymmetric risk-return-profiles from a risk-adjusted perspective