We use simple tools to build multi-asset portfolios

  • Institutional investors are not restricted to a choice between equities and bonds in just one country.
  • To build a multi-asset portfolio, we need to create a decision tree and a chain of conditional probabilities.
  • We can use the PRATER process on any pair of assets. We can calculate the probability that emerging market equities will beat US equities, or the probability that US corporate bonds will beat US government bonds.
  • To create a conditional probability chain, we just link them by calculating the probability that emerging market equities will beat US equities, given the probability that US equities beat US bonds, and so on.
  • The more assets classes we want to incorporate, the longer the chain of conditional probabilities and the more complex the decision tree, but the basic principles don’t change.
  •  We just need to make sure that we calculate the conditional probabilities of all the different orders in which the asset classes can be ranked.