Abstract
Simulations are carried out at the asset allocation level for a balanced portfolio of nine asset classes, comparing the distribution of returns obtained under unconstrained and two levels of constraints and allowing some inferences about the impact of constraints. Portfolio simulation works by selecting a random sample of portfolios from a given investment universe to conform to given limitations and guidelines. The portfolios thus selected can then provide a meaningful comparison for real life portfolios. Comparisons can be based on ex post active return, portfolio tracking error, portfolio style or any quantifiable portfolio characteristic. The metric can be chosen to meet the precise objectives of the analysis. These comparisons can help address some of the gaps left by conventional return and attribution analysis. The potential benefits of single period simulation can be extended to multiple period, enabling evaluation of portfolios in a variety of market conditions. The methodology can be applied to any portfolio comprising traded assets, both exchange-traded and over-the-counter, including asset allocation, equity, fixed interest, futures, options, commodity, and market-neutral portfolios.
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