Asset Allocation example - continued (part 02)
In our last post on Explainable Models: Asset Allocation Example , we separated our asset allocation problem into two parts: A) Estimating future asset performance and correlation, based on model assumptions and available data B) Choosing best portfolio allocation, based on investor preferences and the estimates from A We define these challenges as being entirely separate, when facilitated by our careful design of the data flowing out of estimation process A. This clear separation provides practical benefits to teams and systems undertaking either challenge. We consider A to be primarily a scientific endeavor, albeit one involving some prognosticator's discretion and potential for folly. Generally this estimation will rely in large part on commonly available data, and be comparable with estimates provided by alternative sources. Improvement of these estimates may be pursued in an objective manner. Meanwhile B involves idiosyncratic decisions by investors, which are often