HOW TO BUILD AN INSTITUTIONAL PORTFOLIO
How to Build an How to Build an Institutional Portfolio
Executive Summary: “Structure Determines Performance”
In the following presentation, investors will learn how to build an institutionally weighted portfolio that is considered optimized and efficient. Each slide adds a different asset class (type of investment), and investors will be able to see how each slice of the portfolio’s pie affects returns and risk. The portfolio was constructed with data explained by the Fama/French Five-Factor Model. This model was built by professor Eugene Fama (Nobel Laureate) and his research partner, professor Kenneth French of Dartmouth.
By increasing diversification combined with tilting portfolios toward the three equity factors that tend to produce higher expected long-term investment returns (small companies, value companies, and highly profitable companies), investors will be able to see the effects of each change on the long-term returns and expected volatility (risk). Likewise, investors will see how adding the two defensive factors (term and credit) reduces risk and adds to the portfolio’s expected return. This portfolio does a great job of showing how structure can impact risk and return.