When calculating optimal allocations, indices of historical returns and standard deviations may not be good indicators of future returns and volatility
Could someone pls explain
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
Indices of historical returns might contain unrepresentative sample of assets which are not suitable for determining optimal allocations. For eg: If you use historical returns of Nifty 50, that is not a true measure of optimal allocation as there are many securities that were dropped out of Nifty long ago and using them to compute historical returns is not a good measure.
Standard Deviation considers bothside deviations i,e upside deviation as well as downside deviation for measuring risk. But in reality investors hate losses not risk. So, positive deviation i,e upside deviation will actually not be a problem for investors and only downside deviation is what people hate. So, that is why SD is also not a proper measure of risk. This problem is solved by Sortino Ratio which uses only downside deviation.
thanks