Main asset classes | December 2021 | Risk profile


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The risk-adjusted performance of the global market index continued to climb through the end of 2021, based on the 3-year Sharpe ratio, a volatility-adjusted measure of return. GMI started looking a bit subdued in November, thanks to widespread selling. But the strong rebound in risk assets in December boosted risk-adjusted results for GMI, an unmanaged, market-value-weighted portfolio that holds all major asset classes (except cash).

The GMI’s 3-year Sharpe ratio jumped to 1.29 in December, its highest level in over four years (black line in chart below). The slower-moving 10-year Sharpe ratio, on the other hand, has been relatively stable, hitting 0.99 last month (red line), the highest since April 2019.

History suggests that the upward spikes in the GMI’s Sharpe ratio are rapidly reversing, implying that choppy market activity lies ahead. There are no guarantees, of course. Indeed, skeptics of reading the tea leaves of market history for guidance are quick to note that much of what seemed reasonable for market activity in recent years has been trashed amid a mostly unbroken bull market.

The use of swab to profile GMI risk certainly suggests that a benign climate prevails. GMI closed at an all-time high at the end of 2021, which translates to no decline from peak to trough. This low-risk profile is consistent with recent history: GMI declines have been relatively subdued for more than a year, ranging from zero to around -3.5% at most.

The GMI represents a theoretical reference for the “optimal” portfolio. Using standard financial theory as a guide, this portfolio is considered a preferred strategy for the average investor with an infinite time horizon. These assumptions are, of course, unrealistic in the real world. Nonetheless, the GMI is useful as a baseline for beginning research into asset allocation and portfolio design. GMI’s track record suggests that the performance of this benchmark is competitive with active asset allocation strategies as a whole, especially after adjusting for risk, trading costs and taxes.

For additional perspective, readers can use GMI’s Risk Profile alongside current monthly updates on the performance and expected return of the benchmark and its constituents.

The table below outlines additional risk metrics for GMI and its underlying asset classes, based on a 10-year window to last month.

Here are brief definitions of each risk metric:

Volatility: annualized standard deviation of monthly return

Sharpe ratio: ratio of monthly returns to monthly volatility (the risk-free rate is assumed to be zero)

Sortino ratio: excess performance of downside semi-variance (assuming 0% threshold target)

Ulcer index: duration of drawdowns by selecting a negative return for each period below the previous peak or high watermark

Maximum Drawdown: the biggest drop from peak to trough

Beta: the measure of volatility relative to a benchmark (in this case, the GMI)

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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