Workbook for Volume 1 - Part IV – Section #29: Foundational Papers from the 20th Century, Post-World War II (11 of 15) – Bell & Cover, Brinson, Hood & Beebower
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For returning readers and subscribers: This post introduces a Revised Version for Volume 1 - Part IV – Section #29: Foundational Papers from the 20th Century, Post-World War II (11 of 15) – Bell & Cover, Brinson, Hood & Beebower
Summary:
Volume 1 - Part IV – Section #29: Foundational Papers from the 20th Century, Post-World War II (11 of 15) – Bell & Cover, Brinson, Hood & Beebower - Even though “Expected Utility” won the popularity contest in the 1970s, work continued on the application of the geometric mean, starting in 1980 with a paper by Robert Bell & Thomas Cover, “Competitive Optimality of Logarithmic Investment”. This, and follow-up work described an algorithmic approach to portfolio rebalancing that learns adaptively from past data, and maximizes the log-optimal growth rate. However, this complexity became hard to communicate to retail clients requiring the development of simpler narratives such as Asset Allocation, started in 1986 with a paper by Brinson, Beebower & Hood (BHB 86). This section includes a chart that uses the “Effect Attribution” framework from BHB 86 (in the left column), to compare the results from BHB 86 (in the middle column), with the results from Xiong 2010 (one of the better papers in the field, and shown in the right column). These results show great differences, both from within the BHB 86 paper, and across other papers. This means that finding papers with valid answers to Brinson, et al.’s question about the impact of “Asset Allocation” on the magnitude of total returns requires disclosures that include (i) Sampling choices (size, dates, types of investment vehicle), (ii) Statistical methods (cross-sectional vs. longitudinal), and (iii) Performance calculations (effect attribution framework, arithmetic vs. geometric mean). Let me know if you know of papers that meet these criteria.
Developing…
”CTRI by Francois Gadenne” writes a business book in three volumes, published serially on Substack for public peer-review. The book connects the dots of life-enhancing practices for the next generation, free of controlling algorithms, based on the lifetime experience of a retirement age entrepreneur, & continuously updated with insights from reading Wealth, Health, & Statistics research papers on behalf of large companies as the co-founder of CTRI.