Post-Modern Portfolio Theory (PMPT)
Engineer portfolios for targeted returns
PMPT is an approach to portfolio management that builds on traditional Modern Portfolio Theory (MPT) by separating returns from alpha and beta, altering their sizes to more desirable levels, and deriving more diversified portfolios. This approach allows investors to engineer portfolios that achieve targeted returns and risks.
- Separate returns from alpha and beta to achieve more desirable levels of each
- Derive more diversified portfolios of each to reduce risk and increase potential returns
- Choose a mix of beta and alpha that is explicitly aligned with investor objectives and risk tolerance
- Identify Targeted Return and RiskDetermine the desired return and risk level for the portfolio, taking into account investor objectives and risk tolerance.Pro tipConsider using a combination of beta and alpha to achieve the targeted return and riskWarningBe cautious of over-reliance on beta or alpha, as this can lead to undue risk or underperformance
- Separate Returns from Alpha and BetaSeparate the returns of the portfolio into alpha and beta components, and determine the desired size of each.Pro tipUse a combination of quantitative and qualitative analysis to determine the optimal mix of beta and alphaWarningBe aware of the potential for alpha to be zero-sum, and the importance of selecting skilled managers to generate positive alpha
- Derive Diversified Portfolios of EachCreate diversified portfolios of beta and alpha, using a range of asset classes and managers to reduce risk and increase potential returns.Pro tipConsider using leverage or leverage-like techniques to adjust the expected returns and risks of asset classesWarningBe cautious of over-diversification, which can lead to underperformance and increased complexity
Bridgewater Associates' All Weather portfolio is an example of a PMPT portfolio that has been designed to achieve targeted returns and risks through a combination of beta and alpha.
The concept of PMPT was developed by Bridgewater Associates as a response to the limitations of traditional MPT. The approach has been refined over time through research and implementation with institutional investors.