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INSIGHTS (Financial Professionals Only)

The Risk Contribution of Stocks – Insight Series

ALL CTA PROGRAMS ARE NOT CREATED EQUAL

Ultimately, we conclude that “enhanced diversification” is a potential means of addressing the issues of meaningful diversification, beneficial dilution of stock risk, and improved risk-adjusted expected returns at levels that meet investor goals. We aggregate the summary statistics for the portfolios discussed throughout the Insights. The progression of decreasing concentration of stock risk and increasing Sharpe Ratios is noteworthy. We believe this makes a compelling case for “enhanced” diversification.

The Risk Contribution of Stocks – Part 1

Generally, investments with higher risk are expected to yield higher returns as an incentive to investors. Here, we do not address the issue of return. We simply focus on the risk of various stock-bond portfolios, and examine how much of this risk comes from their components, and, in particular, from stocks.

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The Risk Contribution of Stocks – Part 2

In part two we address the topic of extended diversification: How does investing in other non-correlated asset classes affect total portfolio risk and its components. This may be a particularly important issue at a time when global stock markets are near all-time highs while volatility appears to be almost unusually low.

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The Risk Contribution of Stocks – Part 3

As we’ve learned in parts one and two, 92% of the risk of a 60/40 stock/bond portfolio is contributed by stocks. Diversifying the portfolio by adding managed futures yields some interesting results. As we distribute the risk of the portfolio approximately equally across the three asset classes, it turns out that the risk-adjusted expected return of the portfolio potentially improves. Among the specific hypothetical scenarios we presented, a portfolio with 20/50/30 allocations to stocks/bonds/managed futures turned out to have the highest Sharpe Ratio among portfolios whose allocations to the three asset classes were constrained to add up to 100%.

In this final Insight, we explore the possibility and the consequences of relaxing this constraint.

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FOOTNOTES

Please refer to the glossary for definitions of terms and indices.

Diversification does not ensure profit or prevent losses. An investment in Managed Futures is speculative and involves a high degree of risk. You can lose money in a Managed Futures Program. There is no guarantee that an investment in Managed Futures will achieve its objectives, goals, generate positive returns, or avoid losses.

A Word About Risk
The purchase of a managed futures investment involves a high degree of risk. Specifically, you should be aware that, in addition to normal investment risks, managed futures investments entail certain risks, including, in all or some cases:

• Managed futures often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.
• Managed futures can be highly illiquid.
• Managed futures are not required to provide periodic pricing or valuation information to investors.
• Managed futures may involve complex tax structures and delays in distributing important tax information.
• Managed futures are not subject to the same regulatory requirements as mutual funds.
• Managed futures often charge high fees

THE MATERIAL PROVIDED HEREIN HAS BEEN PROVIDED BY EQUINOX FUND MANAGEMENT, LLC AND IS FOR INFORMATIONAL PURPOSES ONLY.  EQUINOX FUND MANAGEMENT, LLC IS THE ADVISOR TO ONE OR MORE MUTUAL FUNDS DISTRIBUTED BY NORTHERN LIGHTS DISTRIBUTORS, LLC MEMBER FINRA/SIPC.

Securities offered through Equinox Group Distributors, LLC, Member of FINRA. To obtain more information, contact Equinox Funds at 1.877.837.0600 or info@equinoxfunds.com.

3894-NLD-10/01/2018