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[CFA Society Boston] Is Quant Fundamentally Flawed?

April 16, 2020 | 12:00 PM - 2:00 PM

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A Free Webinar, Presented by CFA Society Boston

According to widely referenced applications of the Grinold (1989) “Fundamental Law” theory, simply adding more securities to an optimization universe, adding more factors to a forecast return model, trading more frequently, or reducing more constraints can add investment value to an optimized investment strategy. We show with intuitive discussion followed by a novel simulation study that applications of the Grinold theory for optimized portfolio design are often unreliable and self-defeating. Our simulations demonstrate that for an IC of 0.1 assumed in Grinold (1989), equal weighting may beat budget-constrained MV optimization for many optimization universes in practice. Critical limitations of applications of the “Law” are due to ignoring estimation error (Michaud 1989) and constraints required in practical applications. A substantial fraction of professional actively managed funds may be negatively impacted.


President & CEO, Frontier Advisors

Dr. Richard Michaud is the President and Chief Executive Officer at New Frontier. He earned a Ph.D. in Mathematics from Boston University and has taught investment management at Columbia University. He is the author of Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (1998, 2nd ed. 2008 with Robert Michaud), a CFA Research Monograph (1999) on Global Asset Management, and numerous academic and research articles available on www.ssrn.com and www.researchgate.net. He is co-holder of four U.S. patents in portfolio optimization and asset management, a Graham and Dodd Scroll winner for his work on optimization, a former editorial board member of the Financial Analysts Journal, associate editor of the Journal Of Investment Management, and former director of the “Q” Group.

Managing Director of Research, Frontier Advisors

Dr. David Esch is the Managing Director of Research at New Frontier, having joined the firm in 2008. Dr. Esch completed his Ph.D. in Statistics at Harvard University in 2004. His specialties include mathematical statistics, numerical analysis and computation, Bayesian statistics, and econometrics. He is author of the article “Non Normality Facts and Fallacies,” (Journal Of Investment Management 1st Quarter 2010), selected as one of the best JOIM papers of 2010, and co-author of many other peer-reviewed journal articles. His educational background also includes a Bachelor of Arts degree from Harvard College and a Masters degree in Mathematics and Statistics from Boston University.