Designing an adaptive ETF Model Portfolio in three systematic steps.

Step 2 - Adaptive Asset Allocation - How Twenty20 adapts its asset allocation process to reflect the changing economic conditions

Macro-Economic Data

At Twenty20 we place a large emphasis on the use of macro-economic data when selecting the country or regional exposures we include in our portfolios.

Additionally we supplement these economic indicators with a set of signals which directly uses market information to score and forecast the returns for each ETF under consideration. These models, as one would expect, vary on an asset class by asset class basis.

Bayesian Probabilities

Based on the evidence collected to date, we have developed our own economic regime signal which we use in the spirit of the Reverend Thomas Bayes, who is famous for his theorem about the properties of conditional probabilities.

Economic Regimes

As applied to our problem in hand, it simply tells us that if you have information about how different asset classes behave across and within the four stages of the economic cycle, knowing in which regime you are in will increase the probability of correctly forecasting which asset will provide you with the superior returns.

Next: Step 3 of the Investment Process

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