Main asset classes: January 2022 risk profile


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After a meteoric run up, the global market index’s risk-adjusted performance reversed in January, based on the 3-year Sharpe ratio, a volatility-adjusted measure of return. The slowdown was dramatic, but no less expected after the strong increase of the previous months. As noted in last month’s risk profile, “history suggests that the upward spikes in the GMI’s Sharpe ratio are rapidly reversing, implying that choppy market activity lies ahead.”

After the GMI’s Sharpe ratio hit 1.29 in December (the highest in more than four years), gravity finally prevailed last month and this risk-adjustment performance measure fell to 0.97. . The catalyst: widespread losses across major asset classes in January.

gmi annualized sharpe ratio 3 years 10 years

Despite the setback, GMI’s Sharpe ratio remains relatively high for this unmanaged market-weighted portfolio that holds all major asset classes (except cash). History suggests that a Sharpe ratio at or near 1.0, much less above that mark, is not viable for a passive mix of the world’s major asset classes. Therefore, expecting risk-adjusted performance to decline in the short term is a reasonable estimate.

In line with the Sharpe ratio reversal, the GMI decline steepened last month, falling to -4.6%, the lowest since May 2020. Despite the decline, the portfolio’s current decline is moderate compared to comparisons historical.

Slowdown in the GMI market

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 return of this benchmark will be broadly competitive with active asset allocation strategies, 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.

performance risk summary

Here are brief definitions of each risk measure:

Volatility: annualized standard deviation of monthly return

Sharp Report: monthly returns/monthly volatility ratio (the risk-free rate is assumed to be zero)

Sorting report: excess performance of downside semi-variance (assuming 0% threshold target)

Ulcer index: downside risk measure based on drawdown over a specific period

Maximum withdrawal: the deepest decline from peak to trough

Quiet report: annualized return/maximum loss ratio

Beta: measurement of volatility relative to a benchmark (in this case GMI)

Original post

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


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