With respect to adding managed futures investing to a stock and bond portfolio: A) a trend-following strategy will offer diversification equal to that of a contrarian strategy. B) a trend-following strategy will offer lower diversification than a contrarian strategy. C) a trend-following strategy will offer more diversification than a contrarian strategy.
B?
c
Am headed to bed, will post the answer after a few more replies or when I wake up…whichever comes first…
b
B
Damn !! you guys know your shit… The correct answer was B) a trend-following strategy will offer lower diversification than a contrarian strategy. For managed futures funds, a trend-following strategy will offer lower diversification than a contrarian strategy. This should be obvious since the trends would be those of the cash markets for which the investor is trying to obtain diversification. The market for the underlying securities will also play a role. So could someone pls. explain this to me in english? I couldn’t find where this is from. TIA
Diversification occurs when you add something with (very) different return characteristics than your current portfolio. Trend following = you follow the trend, it isn’t very different from what the market portfolio is doing. Similar return characteristics, low diversification benefits. Contrarian strategy = you try to go in the opposite direction (sell when market is bullish, buy when market is bearish). Very different return characteristics, greater diversification benefit. The fact that you’re using futures to acheive that is not the main part of the question.
Thanks Olivier, makes sense.