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By Juan Carlos Artigas and Nitin Tuteja, World Gold Council
In today’s tough investment environment, asset allocation is a fundamental question any investor or money manager faces: how best to distribute resources across competing assets. It is not a simple problem and there are many approaches to solve it. One method that is widely used in finance is based on modern portfolio theory, which, in turn, relies on three asset characteristics: expected return, volatility and correlation to other assets. This method works on the assumption that, in the long-run, assets tend to react in similar ways depending on the macroeconomic and financial conditions they face. Consequently, correlations among assets combined with their individual volatilities allow an investor to reduce the...
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