Designing an adaptive ETF Model Portfolio in three systematic steps.

Step 3 - Target Risk Portfolios - How Twenty20 uses a mean-variance optimization process to construct its target risk portfolios

Risk Rated Portfolios

Our approach at Twenty20 has been established over more than 10 years, firstly in the area of an actively managed global macro fixed income fund and then to a range of actively managed equity strategies.

Over the last four years our mean-variance optimization framework has been extensively refined and re-deployed in a way that is tailored to a wide range of multi-asset ETF portfolios. The portfolios are constructed so that the risk is targeted to remain within a certain risk band to meet the requirements of many risk rating questionnaires.

Expected Returns

A portfolio with a given level of target risk requires an estimate and forecast for the returns for each of the assets that are targeted to be included in the portfolio.

As the portfolio evolves through time, then in line with changes to the macro-economic conditions we model the impact these changes have on the returns of each asset and sub-asset class.

Trading Signals

At Twenty20 we use a set of trading signals as a proxy for those returns. As such, we use a combination of forward looking macro-economic indicators such as the Purchasing Managers Index (PMI), data from the OECD, and other economic data to identify turning points in economic activity at an early stage.

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