Active Research
Active research for practical portfolio construction
5thN Financial’s research supports actively managed ETF construction through Expanded Portfolio Theory, asset modeling, constraints, and systematic backtesting.
Research framework
Expanded Portfolio Theory and HiFuPi
Expanded Portfolio Theory
EPT is a flexible allocation framework for portfolio problems that may include realistic constraints, turnover limits, nonlinear positions, and operating rules.
HiFuPi asset model
HiFuPi provides the asset-model inputs used by the EPT allocation process for forward-looking analysis and backtesting.
MPT assumptions and EPT flexibility
MPT uses a particular set of assumptions. Apply those same assumptions to EPT, and the resulting solution is the same as MPT. We therefore treat MPT as a special case of EPT.
EPT allows those assumptions to change with the problem being studied. A firm can test different constraints, turnover rules, operating requirements, tax considerations, and investment objectives, including cases that fall outside classic MPT.
Practical implication
A firm can use EPT to reproduce an MPT portfolio, then examine what happens when it changes assumptions or adds requirements. The same framework supports design, testing, and implementation.
From research to daily operation
1. Define the universe. Select eligible securities and required data.
2. Generate inputs. Build return, risk, liquidity, or signal estimates.
3. Apply EPT constraints. Add holdings, turnover, bounds, and operating rules.
4. Backtest and verify. Evaluate allocations, returns, drawdowns, and implementation effects.
5. Deliver outputs. Produce holding files, reports, graphics, and audit trails.