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 Sensible Financial uses NFA software to develop its estimate of the return-risk tradeoff available in securities market, and to develop specific investment recommendations. NFA’s asset allocation approach is based on resampled efficiency (a statistical technique that recognizes that there is a lot we don’t know about the stock and bond markets).
- Resampled efficient portfolios have significant advantages relative to traditionally developed portfolios based on Modern Portfolio Theory.
- Their performance is better on average.
- They are typically far more intuitive.
- The decision making framework is very stable; small input changes typically lead to small changes in recommended portfolios.
- Risk estimation is more realistic.
- The reward-risk ratio improves.
- The when-to-trade rule is the first rigorous rebalancing rule available.
- There is a sharp decline in trading without benefit.
- Richard O. Michaud led New Frontier Advisors in developing the NFA software. New Frontier LLC received the first-ever patent for a broad-based mathematical process designed to identify optimal allocation strategies for real or hypothetical portfolios containing a range of asset classes in March 2000. Dr. Michaud’s research and consulting has focused on asset allocation, investment strategies, global investment management, optimization, stock valuation, portfolio analysis, and trading costs. He has a Ph.D. in Mathematics from Boston University and has taught investment management at Columbia University.
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