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Portfolio Construction

Portfolio Optimization

PMA uses a proprietary quantitative portfolio optimization tool to determine the combination of elements that will provide the best potential reward for the amount of risk that they imply. While many advisors make use of similar analytical tools, PMA’s is unique in that the returns used in the calculation are the actual returns of the funds in the portfolio, rather than average returns from indices.

PMA groups equities as aggressive (which generally have higher potential returns and slightly greater volatility) and conservative (which generally have lower potential returns but slightly less volatility).

Aggressive holdings include international stock funds, as well as domestic stock funds that focus on companies with smaller market capitalizations and a growth orientation.

The conservative holdings include stock funds that invest in larger domestic companies with more of a value orientation.

The fixed income portion of PMA portfolios consists of bond funds that take very few risks, since there is already significant risk exposure on the equity side of the portfolio and the bond funds are meant to abate risk in our portfolios. PMA invests primarily in funds that hold high quality bonds and in funds that hold only short- or intermediate-term bonds to limit interest rate risk.

The portfolio optimization inputs include the expected returns and historical volatility in each sector, as well as the correlation coefficients between the sectors so that we can calculate what mix of elements gives the optimal return for the lowest risk.