A financial professional for more than 20 years, Ed Stavetski serves as the managing director and founder of PCM Partners, LLC. In that capacity, Ed Stavetski calculates risk and determines portfolio strategy for a diverse, ultra-high-net-worth clientele.
As its name indicates, post-modern portfolio theory (PMPT) stems from the modern portfolio theory. Developed in the 1950s and now a widely accepted standard among financial professionals, the modern portfolio theory (MPT) urges diversification and the use of noncorrelated assets to achieve solid risk-adjusted returns. In recent years, however, critics have criticized MPT’s effectiveness and, in particular, its risk-calculation methodologies.
MPT calculates risk using deviation below and above anticipated returns. Known as mean variance, this results in a risk valuation that includes unexpected positive as well as negative outcomes. By contrast, PMPT calculates variance using an asymmetrical model that focuses on downside risk.
Supporters of this methodology hold that only negative returns worry investors, while positive returns are a desired outcome and should not be considered risk. Furthermore, PMPT allows for different client needs and priorities in that it strives to identify returns below a specified target rate, thus enabling managers to customize downside risk. Therefore, although MPT remains the most common methodology across the financial industry, PMPT is gaining a foothold among client-focused investment managers.