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Forecast Confidence™

Portfolio optimizers enhance investment performance by optimally using information. However, optimizers frequently create portfolios that perform poorly compared to equal weighted portfolios. Poor estimates and bad luck are not the primary reasons for these disappointments, though they are often blamed. The essential problem is that portfolio optimizers improperly handle the uncertainty inherent in all investment information. Optimizers assume that optimization inputs are 100% certain, but investors are never 100% certain of future estimates of risk and return.

New Frontier's approach to investing focuses on dealing with investment uncertainty. Michaud Resampled Efficiency defines optimal portfolios relative to the many ways that assets and markets may perform based on the optimization inputs. However, even this procedure does not address an investor's relative faith in the reliability of risk and return estimates.

Forecast Confidence permits investors to include their confidence in their estimates in the optimization. New Frontier relies on the forecast confidence level to determine the variability of the efficient frontier solution. With a high confidence level, the Michaud Resampled Efficient Frontier™ more closely resembles the classical efficient frontier, since the classical optimization process has total confidence in the estimates. The rebalance test also applies smaller statistical regions at higher forecast confidence levels. With a low level of confidence, New Frontier applies larger regions of equivalence.

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