Research Brief: Building and Evaluating Better Risk-Aware Strategic PortfoliosResearchBrief:BuildingandEvaluatingBetterRisk-AwareStrategicPortfolios

Given that investment risk and returns for institutional asset owners will depend on strategic portfolio allocation decisions, what are the optimal strategies for constructing and evaluating portfolios?

Key Findings

• Many asset classes, and the multi-asset portfolios constructed with those assets, exhibit non-normal return distributions.
• Challenges to constructing strategic portfolios fall into two major categories:
  1. What forecast inputs to use and
  2. Understanding the various quantitative approaches and their inherent strengths and weaknesses.
• One means to help manage higher dimensional risk in strategic portfolios is to a defensive equity allocation to hedge against those risks. We evaluate the impact of using PGIM Quantitative Solutions’ US Market Participation Strategy.
• To reach realistic assumptions in building strategic portfolios, forward-looking expectations based on initial conditions in the current environment must be incorporated.