We set simple rules

  • The purpose of calculating any probability is to improve decision-making, so we set a very simple rule.
  • The PRATER is the weight of equities in a two asset portfolio, the rest is bonds.
  • This number is not stable (non-stationary), so the model has to be rebalanced once a week, but this is not a disadvantage.
  • Using the latest data ensures that the model is in tune with current market conditions, not some five year rolling average, or conditions as we would like them to be.
  • We reduce the sensitivity to base effects and rogue data by using multiple sample periods.
  • Convention would typically start with an annual or semi-annual period, but at the time of investment we cannot know which sample period will turn out to be the best predictor of the future, so we need to take the average of several periods.