Morningstar® EnCorr® features a proprietary resampling method that helps create more diversified and risk-optimized portfolios. Efficient frontier graphs may be a valuable method for representing risk-return tradeoffs within a portfolio. But when they come from traditional mean-variance optimization (MVO), they tend to result in portfolios that are not diversified enough. Resampled optimization in EnCorr, which applies Monte Carlo-like simulations to mean-variance optimization (MVO), better identifies the range of uncertainty an allocation might actually experience.
Portfolio resampling: Increased diversification for better risk management
Test Portfolio Before Resampling In portfolios created using traditional mean-variance optimization (MVO) and standard uncertainty parameters, fewer asset classes are represented and changes in weights are more extreme, exposing investors to additional risk. Traditional mean-variance optimization (MVO) is sensitive to input assumptions.
Test Portfolio after Resampling More asset classes are included after running EnCorr’s resampling functionality, which applies Monte Carlo-like simulations to mean-variance optimization (MVO). This reduces prediction error and increases diversification, helping investment professionals develop asset allocation strategies that account for real uncertainties clients may face in the market.