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How Robust Is Your Portfolio?

We recently published a brief LinkedIn note in which we explored how seemingly similar multi-asset portfolios have exhibited notably different patterns of returns in different volatility regimes in the past 19 years. In this notebook we use ALPIMA's powerful quant API, Tau to expand upon some of the details in that post, and develop the ideas to formulate a measure of portfolio robustness: the ALPIMA Robustness Indicatorâ„¢.

Table of Contents


The essential idea is that decomposing the return distribution of a portfolio into separate distributions based upon market regimes (as defined using a volatility indicator, such as the VIX index, and changes thereof) may elicit a stronger understanding of the drivers of performance, and furthermore, give some indication as to how robust, and hence well constructed the portfolio is. For example, if the returns are broadly normal in times of market calm (with the expectation of future calmness), but strongly left skewed and platykurtic (fat-tailed) in times of turbulence (with the expectation of future turbulence), this may be indicative of a portfolio whose performance is overly driven by market exposure or being short vol.

Intuitively, it seems clear that the notion of robustness is connected to that of antifragility popularised by Nassim Taleb [1]. A simple, universal measure of financial robustness allows one to objectively rate any portfolio in terms of its invariance to different market regimes. It is a useful complement to the traditional suite of risk and performance metrics (average returns, volatility, VaR, Sharpe ratio, drawdowns, diversification ratio and factor exposures).

This will be explored in further detail in this notebook. However, before we begin, it is necessary to ensure we have the latest version of Tau, ALPIMA's quant API. Note that this research notebook requires version 1.6.

[1] Antifragile, Nassim Nicholas Taleb, 2012, Penguin Books

Install the latest version

Import required libraries

Partitioning volatility into regimes

Decomposition of the portfolio return distribution

Decomposition of the benchmark return distribution

For comparison, we repeat the analysis with the portfolio benchmark, the Morningstar Asset Allocation TR Index:

A portfolio "robustness" score

We summarise the return distributions of the multi-asset portfolio and benchmark index for side-by-side comparison: