Formal Asset Allocation with Price Trending
April 10, 2013 - Strategic Allocation
Should investors consider a broader framework to encompass trend-following/momentum investing strategies? In his March 2013 paper entitled “Asset Price Trend Theory: Reframing Portfolio Theory from the Ground Up”, Robert Dubois presents a portfolio allocation strategy that explicitly includes an assumption that asset prices trend (exhibit return autocorrelation or intrinsic momentum). His approach augments risk management by including stop-loss protocols to exit allocations to some assets/strategies based on their trends relative to specified thresholds. He defines three strategic allocation segments: (RB1) risk-free assets; (RB2) liquid risky assets/strategies subject to stop-loss exits at the asset and/or portfolio level; and, (RB3) both liquid and illiquid risky assets not subject to stop-loss exits. All three segments are subject to asset/strategy selection, position sizing and entry rules. RB2 arguably allows strong risk management (containment) via trend-related removal of exposure to risky assets with below-trend performance. Elaborating on this framework, he concludes that: Keep Reading