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8 Asset Class Portfolio Update Ledoit, Oliver and Wolf, Michael, 2003. "Improved Estimation of the Covariance Matrix of Stock Returns with an Application to Portfolio Selection." Journal of Empirical Finance, v.10, pp.603-621. Markowitz, H.M., 1952. "Portfolio Selection." The Journal of Finance, 7, pp.77-91. Markowitz, H.M., 1959. "Portfolio Selection: Efficient Diversification of Investments." New York: John Wiley & Sons. Meucci, Attilio, 2011. "A Short, Comprehensive, Practical Guide To Copulas." Risk Professional, October 2011, pp.22-27. Michaud, R.O., 1989. "The Markowitz Optimization Enigma: Is 'Optimized' Optimal?" Financial Analysts Journal, v.45, pp.31-42. Michaud, R.O., 1998. "Efficient Asset Management." Harvard Business School Press, Boston. Pastor, Lubos and Robert F. Stambaugh, 2012. "Are Stocks Really Less Volatile in the Long Run?" The Journal of Finance, 67, pp.431-478. Patton, Andrew J., 2004. "On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation." Journal of Financial Econometrics, vol.2/1, pp.130-168. V. Glossary of Terms Bayesian statistical approach. A statistical framework that allows for consistent integration of various sources of information. A Bayesian approach allows for integration of data (e.g., returns for an asset class) with external information, such as uncertainty about the model parameters (i.e., mean, standard deviation, correlation, etc.) and other views imposed by an analyst. Bootstrap estimation method. The bootstrap is a statistical method for estimating the distribution (i.e., histogram) of an estimator (such as sample mean or portfolio weight) by resampling the observed sample data or a model estimated from the data. Correlation. A statistical measure of how two securities move in relation to each other. Perfect positive correlation (a coefficient of +1) implies that as one security moves, either up or down, the other security will always move in the same direction. Perfect negative correlation (a coefficient of -1) means that if one security moves up or down, the negatively correlated security will always move in the opposite direction. If two securities are uncorrelated, the movement in one security does not imply a linear movement up or down in the other security. Estimation risk. Sometimes also called "parameter uncertainty" is the error introduced in portfolio construction process that arises from differences in values in forecasted and realized expected returns, standard deviations, and correlations. Expected return. The mean of a probability distribution of returns. Mean-variance optimization. A method to select portfolio weights that provides optimal trade-off between the mean and the variance of the portfolio return for a desired level of risk. Standard deviation. A statistical measure of dispersion of the observed return, which depicts how widely a stock or portfolio's returns varied over a certain period of time. When a stock or portfolio has a high standard deviation, the predicted range of performance is wide, implying greater volatility. FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY © 2024 Envestnet. All rights reserved.