Written in 1986 by Gary Brinson, Randolph Hood and Gilbert Beebower, ‘Determinants of Portfolio Performance’ suggested that risk-adjusted return optimization is best achieved via capital allocation across asset classes with low correlation. While investors have since taken issue with the fundamental focus of the paper being volatility rather than return, there is little debate that market return, asset allocation and individual security selection remain the three primary determinants of portfolio return. Market return constitutes the ‘beta’ of a portfolio, while sector and security selection contribute to ‘alpha’. Prior to security selection, asset allocation driven by a focus on diversification across low-correlation asset classes remains paramount. Simply stated, asset allocation involves adjusting portfolio exposure across different asset classes and different sectors within each asset class.
Traditional asset classes include stocks and bonds while alternative asset classes include real estate, commodities, foreign exchange, art and other collectibles. Investors are well served to view cannabis as an alternative asset class and to carefully consider sector diversification as an essential
alpha generation strategy.
There are over 12,000 businesses that are
licensed to operate within the
cannabis supply chain and perhaps
nearly 20,000 unlicensed businesses
that operate in the moat created by
federal policy around the
cannabis castle.
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