Main asset classes October 2021 Risk profile


It had to end eventually. The recent rise in the Sharpe ratio for the Global Markets Index (GMI) finally reversed in October. The drop marks the first time in eight months that this popular measure of risk has eased for GMI, a market value-weighted unmanaged portfolio that holds everything (except cash).

GMI’s Sharpe ratio fell to 0.95 last month after hitting a two-year high the month before. The calculation is based on an annualized 10-year moving window via monthly data and assumes a zero percent risk-free rate throughout.

GMI 10-year annualized Sharpe ratio

GMI 10-year annualized Sharpe ratio

Risk-adjusted performance fell, but GMI’s rebound in October took it to a new record. As a result, the index’s drawdown came down to zero last month, where it was for much of 2021.

History of GMI withdrawals

History of GMI withdrawals

The GMI represents a theoretical benchmark 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 benchmark for starting research on asset allocation and portfolio design. GMI’s history suggests that the performance of this benchmark is competitive with active asset allocation strategies on the whole, particularly after adjusting for risk, trading costs and taxes.

For more context, readers can use this Core Risk Profile for GMI with current monthly performance updates and for the benchmark and its constituents.

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

Summary of performance and risks
Summary of performance and risks

Here are brief definitions of each risk measure:

  • Volatility: annualized standard deviation of monthly return
  • Sharpness ratio: monthly returns / monthly volatility ratio (the risk-free rate is assumed to be zero)
  • Output report: Downside excess performance of the semi-variance (assuming a target threshold of 0%)
  • Ulcer index: duration of drawdowns by selecting a negative return for each period below the previous peak or high water mark
  • Maximum draft: deepest decline from peak to trough
  • Beta: measure of volatility against a benchmark (in this case GMI)
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