Previously I discussed an of import debate on whether it is amend to growth a portfolio's provide past times taking on to a greater extent than risks (e.g. belongings high-beta stocks), or past times increasing leverage precisely belongings low-risk assets. H5N1 reader Mr. F. Sudirga has kindly mail me another interrogation papers supporting the decision that increasing leverage is the preferred way.
In a newspaper titled "Risk Parity Portfolios", MD Edward Qian at PanAgora Asset Management argued that a typical 60-40 property resources allotment betwixt stocks as well as bonds is non optimal because it is overweighted amongst risky assets (stocks inwards this case). Instead, to laissez passer on a higher Sharpe ratio land maintaining the same endangerment score equally the 60-40 portfolio, MD Qian recommended a 23-77 resources allotment land leveraging the entire portfolio past times 1.8. The stock-bond dichotomy is for example alone -- the results tin live on improved farther past times including other property classes such equally commodities.
The alone reservation I accept amongst all this enthusiasm amongst increasing leverage is i that many risk-managers are aware of: virtually of the interrogation uses concepts such equally measure deviations to mensurate risk. But equally the LTCM debacle also equally the recent subprime mortgage meltdown has reminded us, risky events accept fat-tailed distributions. Therefore, i should live on really wary of using measure difference equally the sole determinant of leverage.
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