AI-Optimized Asset Allocation for Inflation Scenarios
By Big Data Federation, Inc.
Inflation has been causing fear, and its future trajectory is still up for debate. While it remains unclear where it will land in a year, it has displayed a promising but rocky downward trend so far. Inflation’s direction is one key factor in asset allocation; however, how to optimally allocate assets based on various unfolding scenarios for a spectrum of investors’ goals has been an age-old complex problem.
Leveraging our big data and machine learning models, we hypothesize various outcomes for changes in inflation twelve months into the future for a multi-asset portfolio. As displayed in the table below, our portfolio mix includes bonds, S&P 500, and commodities. Each scenario produces three bespoke portfolios, optimized for either the Sharpe Ratio, return, or risk.
|
Change in Inflation* |
# of Occurrences |
AI-Optimized Asset Allocation |
|||
|
Optimized for |
Bonds1 |
S&P 500 |
Commodities2 |
||
|
+1% |
63 times |
Sharpe Ratio |
47% |
2% |
51% |
|
Return |
48% |
0% |
52% |
||
|
Risk |
60% |
20% |
20% |
||
|
0% |
437 times |
Sharpe Ratio |
64% |
34% |
2% |
|
Return |
13% |
87% |
0% |
||
|
Risk |
61% |
21% |
19% |
||
|
-1% |
63 times |
Sharpe Ratio |
48% |
52% |
0% |
|
Return |
17% |
84% |
0% |
||
|
Risk |
60% |
21% |
20% |
||
|
-2% |
19 times |
Sharpe Ratio |
64% |
35% |
1% |
|
Return |
65% |
35% |
0% |
||
|
Risk |
40% |
25% |
35% |
||
|
-3% |
12 times |
Sharpe Ratio |
45% |
24% |
31% |
|
Return |
76% |
0% |
25% |
||
|
Risk |
32% |
30% |
38% |
||
*Measured as YoY change in Core CPI
Initially, our models complete an extensive search throughout history, dating as far back as the 1920s if the data is available, to identify periods that match the defined scenario. Next, our machines capture monthly returns for all portfolio components over the identified period that match the defined scenario. Finally, our algorithms solve a nonlinear optimization problem, considering the performance of individual components and their correlations while adhering to given constraints.
1 Ibbotson® SBBI®: Long-Term Govt Bonds (Total Return)
2 Commodities as defined by Bloomberg Commodity Index
About OdinUltra
OdinUltra is a cutting-edge no-code specialized AI platform, designed to cater to a wide array of professionals in the asset management industry. It is a battle-tested specialized partner that empowers users including discretionary, quantitative, multi-asset, and multi-strategy managers to harness the immense potential of big data and sophisticated investment techniques. From idea exploration and construction to verification and deployment, OdinUltra is an all-encompassing tool. Asset managers can enhance existing products and rapidly develop new ones, securing a competitive edge in the dynamic world of asset management.
Published by Big Data Federation · All insights · Subscribe to Insights