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White Paper From Gravity Investments Challenges the Efficient Frontier
Firm's Research Concludes That Optimizing for Diversification Outperforms Traditional Risk Approach
| Source: Gravity Investments
DENVER, CO--(Marketwire - October 1, 2009) - Gravity Investments (Gravity), a premier
financial engineering firm responsible for the Gsphere visual asset
allocation platform, today issued a paper on portfolio optimization and the
comparative value of optimizing specifically for diversification.
The paper, entitled "How True Diversification™ Preserves Capital,"
concluded that optimizing portfolios for diversification provides a
positive impact to bear market returns at entirely no cost to bull market
returns, resulting in dramatically better performance across a full market
cycle. Diversification, not risk, is thus warranted according to Gravity as
the focus of portfolio optimization for asset allocation.
"We've known for some time that True Diversification is a primary enabler
of achieving higher returns," said James Damschroder, Founder of Gravity
Investments and the firm's chief financial engineer. "Now we know precisely
why. With True Diversification, there really is such a thing as a free
lunch."
Gravity conducted research on 95 actual Registered Investment Advisor
portfolios in place between the years 2002 and 2009. The firm examined the
portfolios across three time periods -- bull market, bear market, and the
full cycle, grading each portfolio -- using Gravity's proprietary
diversification measurement.
IPC, Gravity's patented measurement of diversification, produces the
weighted average of all unique correlations in a portfolio and provides a
measurement of diversification specifically tuned to systematic risk.
Gravity calls this advancement in the science of diversification
measurement and optimization "True Diversification."
The results of Gravity's research indicated that every extra percent of IPC
was responsible for protecting 98 basis points of capital in a down market.
By comparison, similar changes in standard deviation showed a much weaker
relationship to returns in both bull and bear markets.
"Based on these results, it's reasonable to infer that the traditional
practice of using a Markowitz efficient frontier as a menu of portfolios
may be of dubious merit," says Damschroder. "It's hard to argue the logic
of True Diversification when it protects capital in down markets without
sacrificing gains in up markets."
Gravity's innovative approach to portfolio construction will benefit
virtually every sponsor of investment product, including broker/dealers,
RIAs, insurance companies, mutual fund companies, hedge funds, pension
plans, bank trust groups, 401(k) providers, fund consultants, family
offices, foundations, and endowments.
About Gravity Investments
Gravity Investments, the worldwide leader in Diversification Intelligence,
is a leader in financial engineering and investment technology. A
Denver-based firm, Gravity's Gsphere Portfolio Analysis Platform bridges
the gap between traditional asset allocation and diversification
optimization, providing clients an unparalleled ability to manage and
market investments. For more information on Gravity Investments please
visit www.gravityinvestments.com or call 866-373-8489.