Financial Express

Financial Express


Cass Consulting undertook research to test a new portfolio construction methodology developed by Financial Express (FE). Using a review of the literature to confirm that the methodology was theoretically sound, the team then provided a simulation, which confirmed that it could lead to improved investment performance.


FE provides investment data, software tools and performance analysis to the financial services industry. They had developed an innovative portfolio construction technique, which they believed overcame some of the severe shortcomings of methods that were currently being used in the industry.

They approached Cass to undertake research that was aimed at answering two key questions:

  1. Was their proposed approach theoretically sound?
  2. Would their approach have led to an improvement in performance over more traditional methods?


The project was led by Dr Nicholas Motson who worked together with Professor Andrew Clare.

FE was proposing a portfolio construction methodology that was substantially different from mean-variance optimisation in that instead of using expected returns it used the asset variance. Under their framework the optimal portfolio was the one with the greatest "diversification ratio", which was defined as the ratio of the weighted average of the volatilities of assets to the volatility of the portfolio of the same assets.

A comprehensive review of the academic literature was presented to FE, which showed that the issues they had identified with mean variance analysis were valid and that others had proposed an approach that was similar but not identical to theirs. The team was also able to identify the assumptions that were inherent in using the diversification ratio and hence ascertain where its use was valid.

Empirically, the Cass consultants provided a simulation using 600 years of randomly generated data, which illustrated both the limitations of the traditional approach and how the new approach would be an improvement. They went on to test the performance of various optimisation techniques using long run data on equities as well as other asset classes. The results showed that the methodology proposed by FE could indeed lead to substantial improvements in performance with lower portfolio turnover in many cases.

Read more about other Cass Consulting projects on the Case Studies page