Revolutionizing Portfolio Theory: Adaptive Asset Allocation (Part 1)

Modern Portfolio Theory (MPT) revolutionized investment by emphasizing diversification to optimize portfolios. However, its application in Strategic Asset Allocation (SAA) has faced criticism due to reliance on long-term parameter estimates. This article explores an innovative approach — Adaptive Asset Allocation (AAA) — which challenges these traditional methodologies. The original paper, titled “Adaptive Asset Allocation: A Primer,” authored by Adam Butler, Mike Philbrick, Rodrigo Gordillo, and David Varadi. Adaptive Asset Allocation Methodology AAA stands out by advocating for shorter time horizon parameter estimates, recognizing their superiority in capturing fluctuations that long-term estimates often overlook. By acknowledging the variability of these parameters over time, AAA aims to construct portfolios that dynamically adapt to changing market conditions, potentially leading to improved performance. <a href="https://medium.com/@bauermartin101/revolutionizing-portfolio-theory-adaptive-asset-allocation-part-1-c5d49a43232f">Website</a>