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Sample Cases

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New Frontier provides some sample cases for your use in the samples directory. The default location for the samples directory is C:/Program Files/NewFrontier/8.0/samples.  The Estimator can open Estimator cases (*.nfei) and return series (*.nfrs).  

Michaud 1998 book

The Michaud 1998 book case consists of data used by Richard Michaud when he prepared Efficient Asset Management. The default inputs and results that populate the Optimizer when it is first opened come from this case. The data consists of six country equity indices and two bond indices: Canada, France, Germany, Japan, United Kingdom, United States, a U.S. bond index and a Eurobond index. The non-U.S. equity indices are all MSCI data and the U.S. equity index is the S&P 500.  The dataset is meant to illustrate a reasonable global asset allocation but is not for investment purposes.

Michaud 2008 paper

The Michaud 2008 case offers the data used by Richard Michaud and Robert Michaud in "Estimation Error and Portfolio Optimization" (Journal Of Investment Management, Q1 2008). Following Jobson and Korkie (1981), the optimizations are illustrated based on the risk and returns of twenty U.S. stocks randomly chosen from 100 largest capitalization stocks in the S&P 500 index with continuous monthly returns from January 1997 through December 2006. The list of stocks, their annualized average returns, standard deviations and correlations over the period and further details are given in the appendix to the paper.  

Vanguard Data

New Frontier includes data for several index funds provided by Vanguard with the Asset Allocation System. Because Vanguard uses a passive, full-replication approach to managing their index funds, the funds may be expected to serve as good proxies for the underlying indices. The equity funds track their CRSP, FTSE, and MSCI index counterparts. The fixed income index funds track the appropriate Bloomberg Barclays Capital indices.

The four Vanguard cases are named according to the frequency of the data provided: annual, monthly, quarterly, and weekly. This leads to slightly different correlations and therefore slightly different results. In addition, the weekly case lacks inflation adjustment since the CPI isn't available on a weekly basis.  

These cases also contain sample contrasts to explore.

  • The Market Forecast contrast predicts an 8% total return for the market with a 10% standard deviation (confidence level). In this example, market capitalizations are used to predict each asset’s contribution to the mean return.  A 60% equity, 40% bond market is assumed.  For example, Europe represents a large portion of the global market, and so its contribution to the mean is expected to be greater than an equity that represents a smaller portion of the market, such as emerging markets. In this case, the forecast contrast column sums to 100%, so the capitalization weighted sum of all asset returns is expected to be approximately 8%.

  • The Equity Premium contrast demonstrates a case where a 6% premium is expected for equities over the return of fixed income assets. This contrast is set up such that the average of all equities is equal to 6% above the average of all fixed income assets. A 10% standard deviation of the mean forecast may be given as an example. The positive coefficients in this column sum to 100%.  Since there are seven equal-weighted equities, give each one a coefficient of +100% / 7 = +14.3%. Similarly, since the negative fixed-income weights sum to -100%, give each of the five fixed-income assets coefficients of -100% / 5 = -20%.  The return of assets with a positive coefficient will have a mean return of 6% above the mean return of the assets with negative coefficient, with some variability guided by standard deviation of the forecast.  

  • The Small to Large US forecast contrast is a simple example where US Small Cap stocks are predicted to outperform US Large Cap assets by 1%. Small Growth and Small Value are each assigned coefficients of 50%.  Large Cap Growth and Large Cap Value have coefficients of -50%. The mean return of the Small Cap equities is predicted to be 1% greater than the mean return of the Large Cap equities, with some variability for standard deviation. To activate this contrast, New Frontier suggests a standard deviation of around 5%.

The following funds have been included in the investment universe:

  1. CPI (seasonally adjusted, as reported by the Bureau of Labor Statistics)

  2. Vanguard Short-Term Bond Index

  3. Vanguard Intermediate-Term Bond Index

  4. Vanguard Long-Term Bond Index

  5. Vanguard Inflation-Protected Securities Index

  6. Vanguard High-Yield Corporate Index

  7. Vanguard REIT Index

  8. Vanguard European Stock Index

  9. Vanguard Pacific Stock Index

  10. Vanguard Emerging Markets Index

  11. Vanguard Growth Index

  12. Vanguard Value Index

  13. Vanguard Small-Cap Growth Index

  14. Vanguard Small-Cap Value Index

 

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