Beyond the Efficient Frontier with SynthEquity™ - Using Call Options to Modernize MPT

Guest Author
July 2, 2024

Guest Author: Alexander Flecker, Head of Sales and Marketing, Measured Risk Portfolios

“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.” - Harry Markowitz

Since Harry Markowitz introduced the concept of the Efficient Frontier in his seminal 1952 paper “Portfolio Selection,” Modern Portfolio Theory (MPT) created a rational and scientifically grounded way to construct portfolios for investors with varying risk tolerances. MPT advocates for diversification to optimize the risk-return trade-off. The theory suggests that for a given level of risk, there is an optimal portfolio allocation that maximizes expected return, and this optimal portfolio lies on the efficient frontier.

Markowitz’s findings coincided with other revolutionary developments in the wealth management industry, namely the growth of Mutual Funds. In 1952, the total AUM of all mutual fund assets was $3.93 billion. By the time Markowitz, Sharpe, and Miller were Co-Winners of the Nobel Prize in Economics for evaluating stock market risk and reward in 1990[1], the mutual fund industry had grown to over 1 trillion dollars in assets under management, ~25,000% growth [2]. The investment industry's adoption of mutual funds allowed for a more efficient means of accessing broadly diversified portfolios that reduced unsystematic risks and adhered to MPT findings.

Many investors, generally speaking, have a moderate risk tolerance, defined as being willing to accept modest risk to seek higher long-term returns [3]. As mathematically plotted below, using a two-security portfolio of the SPDR S&P 500 Trust ETF (SPY) and iShares Core US Aggregate bond ETF (AGG), a broadly diversified allocation of 60% equities for growth and 40% bonds for safety falls very nearly in the middle of the efficient frontiers' possible returns for a given level of risk. Hence, the enduring popularity of the '60/40' within the context of MPT.

Source: 60% SDPR S&P 500 Trust (SPY) | 40% iShares Core US Aggregate Bond ETF (AGG): Efficient Frontier 

[1] | Harry Markowitz

[2] Investment Company Institute Fact Book

[3] Stifel Nicolaus: Risk Classification Definitions

By 2023, the mutual fund industry grew to over 25 trillion dollars in AUM, affording the ability for everyday investors to easily access the risk and reward profile of a broad-based 60/40 by allocating to popular funds, such as the all-in-one 60/40 - VBIAX, The Vanguard Balanced Index Adm., which has a 7-bps expense ratio and $51 billion dollars in AUM.

According to YCharts, the 60% SPY and 40% AGG Portfolio have a 10-year average annualized return of 8.7% and a standard deviation of annual returns (quarterly) of 11.02%. Based on expectations set by MPT and the efficient frontier, the 60/40 has largely performed as advertised, balancing modest risk for higher long-run returns. However, intra-year volatility has not been as modest as its recent calendar-year track record suggests. 

Source: 60% SPY /40% AGG Hypothetical Portfolio Calendar Year Returns (01/01/2014 - 03/31/2024)

In the last 20 years, a 60% SPY and 40% AGG portfolio have had two (2020/2022) intra-year peak-to-trough drawdowns that exceeded -19% and one greater than -30% intra-year peak-to-trough drawdown (2008) [4].

Since two of the three significant drawdowns for the 60/40 occurred within the last five years, many investors have questioned the approach's viability.

Industry pros may have noticed the sheer volume of investment firms suggesting that advisors should consider alternatives or, even more bluntly, that the 60/40 is dead. After seven decades of adoption and inertia, dethroning MPT as the go-to portfolio construction methodology will likely take much more than an attempt to democratize a few alternative asset classes.

But that doesn’t mean we can’t strive to do better.

According to the market research firm DALBAR, which recently concluded its 30th Annual Quantitative Analysis of Investor Behavior (QAIB) report, the average equity fund investor earned 5.5% less than the S&P 500 in 2023, the third-largest gap in 10 years. The reasons cited were that emotional decisions hurt returns, as investors tend to sell out of investments during downturns and miss out on rebounds.[5] Despite an optimized allocation to balance risk and reward using MPT and the efficient frontier, how many investors gave into loss aversion during the downturns for the 60/40, especially after 2022, and missed out on the rebound since? Likely, many. The number one contributor to Advisor Alpha is helping clients stay invested according to their long-term plans.

At Measured Risk Portfolios, we don’t believe ‘The 60/40 is dead’ per se; however, we believe advisors have better options for pursuing advisor alpha than traditional asset allocation alone.

[4] YCharts 60/40 Benchmark Percent off Highs

[5] DALBAR QAIB Report

Beyond the Efficient Frontier with Options

Incorporating options into an efficient frontier is possible but complex, which makes it less utilized. Options introduce non-normal distributions, high degrees of skewness, and a non-linear, asymmetric risk-return trade-off. Terms like Delta, Gamma, Vega, Theta, and Rho are all specific terms used to measure options behavior and lead experienced advisors and inexperienced clients to indecision. However, when options are appropriately integrated into a portfolio, they do not have to be as complex as the efficient frontier model suggests. Instead, they can significantly differentiate investment offerings, enhancing the choices available to advisors and their investors from a risk vs. expected return standpoint.

When long call options are integrated into a portfolio, the efficient frontier can experience an upward and outward shift. Essentially, the limited downside risk (the premium paid) combined with the potential for substantial gains (if the underlying asset appreciates) helps redefine the traditional risk-return paradigm Markowitz introduced in the 1950s.

This non-linearity means the portfolio can achieve higher returns with mathematically known and defined risk before a market decline, potentially enhancing overall efficiency compared to traditional portfolios while overcoming behavioral basis that may be caused by uncertainty about future volatility.

Consider the risk and reward profile of investors who purchase long call options for their equity exposure vs. investors who purchase equities directly. As illustrated below, losses are capped at the premium paid to purchase an options contract for the long-call investor, while the upside has unlimited return potential. 

Source: Encyclopedia Britannica, Inc. 

Make Real Progress with SynthEquity™

Measured Risk Portfolios uses call options to expand the efficient frontier and assists in overcoming common behavioral biases using a proprietary actively managed portfolio construction methodology called SynthEquity™ (Synthetic Equity). SynthEquity™ portfolios are designed to attempt to capture the uncapped long-run performance of a stated index with a fraction of the risk. Portfolio risk is determined by allocating a predefined percentage of a portfolio in call options over a 12-month period and pairing it with an outsized allocation to short-duration US Treasuries. MRP SynthEquity™ Portfolios have a demonstrated track record of outperforming its stated benchmark in numerous calendar years. Complementing the uncapped upside potential, there is a floor on potential losses*.

This strategy builds on the efficient frontier concept, attempting to maximize returns for a given level of risk. However, this strategy shifts the efficient frontier due to the asymmetry of the call options contracts used to obtain market exposure for growth.

SynthEquity™ Portfolios have three pre-built risk models: Growth, Core, and Lite:

Measured Risk Portfolios Growth: ~12.5% Long Duration Call Options | ~87.5% Short Duration Treasuries.

Growth Benchmark: 100% ^SPX

Measured Risk Portfolios Core: ~10% Long Duration Call Options | ~90% Short Duration Treasuries.

Core Blended Benchmark: 70% ^SPX / 30% AGG

Measured Risk Portfolios Lite: ~7.5% Long Duration Call Options | 92.5% Short Duration Treasuries.

Lite Blended Benchmark: 50% ^SPX | 50% AGG | Performance period = 01/01/2016-03/31/20204 | MRP SynthEquity™ is stated Net of Fees. Benchmarks are stated Gross of Fees.

Using SynthEquity™ to Potentially Enhance 60/40 Portfolio Allocations

Here, we use hypothetical analysis to compare how replacing 60% SPY / 40% AGG allocation components with a pre-built SynthEquity™ portfolio would have changed an investor's experience from 01/01/2016-03/31/2024. The 60/40 Portfolio will be referred to as the benchmark. Measured Risk Portfolios SynthEquity™ is stated net of fees, while the benchmark is shown as gross of fees.

Maximizing the ‘40’: Replacing 40% AGG with MRP LITE

Source: YCharts|40% of the 100% Hypothetical Allocation to MRP Lite is represented by composite account performance and is stated net of fees. The Remaining 60% is represented by SPY and is gross of fees. The Benchmark 60/40 is stated gross of fess.

Many advisors field calls from their clients over Nvidia’s growth, whether the market is valued fairly, how the election will affect their portfolio, and other such questions. But how often does a client call to ask whether their portfolio's bond allocation is maximized for alpha?

Introducing MRP SynthEquity™ Lite as a bond replacement in the 60/40 benchmark allows an advisor to make their bond allocation worth talking about while substantially improving the historical return of the portfolio.

By replacing a 40% allocation to AGG with Measured Risk Portfolios SynthEquity™ Lite, the portfolio allocation would be approximately:

  • 60% SPY
  • 3% Long Duration Call Options on the S&P 500
  • 37% Short Duration US Treasuries

A 3% net change in the overall portfolio allocation from fixed income to actively managed long-duration call options would have resulted in similar max drawdowns as the benchmark; however, it would have added 57.6% greater returns over the observed period. This strategy would have effectively pushed the portfolio's expected return higher without significantly changing the overall risk characteristics measured by peak-to-trough drawdowns.  

Risk Reduction: Replacing the ‘60’ Measured Risk SynthEquity™ GROWTH

Source: YCharts|60% of the 100% Hypothetical Allocation to MRP Growth is represented by composite account performance and is stated net of fees. The Remaining 40% is represented by AGG and is gross of fees. The Benchmark 60/40 is stated gross of fess.

By subbing out SPY for Measured Risk Growth as the 60% allocation to equities within a 60/40 portfolio, the historical upside is slightly improved, and drawdowns are far less severe due to the non-linear risk vs. reward profile of call options.

If the 60% allocation to SPY were replaced with a 60% allocation to Measured Risk SynthEquity™ Growth Sleeve, the total portfolio allocation would be:

51-53% short-duration treasuries

40% AGG

7-9% long-duration call options on the S&P 500.

Should the equity market experience a severe drawdown, such as in 2020, the total portfolio will automatically move into an increasingly conservative allocation with a greater fixed income weight as the call options lose value. The defined risk nature of long call options allows investors to position their portfolio for growth while remaining mindful of potential needs for capital preservation. 

Replacement of the 60/40 with MRP CORE

Source: YCharts|MRP Core is represented by composite account performance and is stated net of fees. The Benchmark 60/40 is stated gross of fess.

MRP Core is designed to capture the long-term returns of a 70% SPY and 30% AGG portfolio and does so by allocating ~10% to long-duration call options and ~90% to short-duration treasuries.

Given the double-digit decline in AGG, greater than -18 % in 2022, paired with more recent concerns about equity market valuations, ETF concentration to big tech, geopolitical uncertainty, etc., investors may find replacing the entire 60/40 portfolio allocation with MRP Core an attractive risk management solution. Over the observed period, MRP Core has a max drawdown of -13.11% net of fees, while 60/40 has a max drawdown of -20.88%. We must also remember that the 60/40 losses are only as bad as they were and don’t represent a limit. Nothing stops the losses from going to -22%, -28%, or even -35%.  

Historically, the key difference between the risk profile of MRP Core and the benchmark is that, unless short-duration Treasuries were to suffer permanent impairment to its principal, thanks to the non-linear risk vs. reward profile of buying long calls, MRP Core delivered its maximum possible drawdown for the 2022 calendar year due to equity volatility. In contrast, the benchmark could have potentially lost significantly more value.

Should investors have allocated 100% of their 60/40 benchmark portfolio to MRP Core over the observable period, the investor would have enjoyed over 25% greater total returns and a greatly improved max drawdown. 

Maximizing Risk-Adjusted Returns: Complete Replacement with MRP Growth

Source: YChartsMRP Growth is represented by composite account performance and is stated net of fees. The Benchmark 60/40 is stated gross of fess.Since 01/01/2016 – 03/31/2024, Measured Risk Portfolios Growth has outperformed the S&P 500 on a total return basis. 

MRP Growth affords investors the ability to access the expected returns of the far right of the efficient frontier, which is a 100% allocation to equities, with a lower historical max peak-to-trough drawdown when compared to even a highly conservative portfolio of 75% AGG and 25% SPY. While MRP growth is more volatile than hypothetical 75% bonds and 25% equities, the expected return is significantly higher, made possible through the strategic use of call options.

Compared to the 60/40 illustrated above, Measured Risk Portfolio growth nearly doubled the total return since 2016, with lower peak-to-trough max drawdowns. Assuming that the short-duration treasury allocation will mature at full face value during market downturns, investors are afforded peace of mind, knowing there is a floor on potential losses* while the upside is potentially greater than that of a 100% allocation to SPY. 


SynthEquity™ redefines portfolio management by integrating call options to expand the efficient frontier upwards and outwards, enabling the pursuit of higher returns with a managed and clearly defined risk profile. This strategic blend of Treasury stability and equity growth potential addresses common investor biases during market volatility, offering advisors a compelling solution to deliver enhanced value with more predictable outcomes. Measured Risk Portfolios believes integrating call options as part of asset allocations modernizes traditional investment philosophies for today's dynamic markets.

About the Author

Alexander has a Bachelor of Science in Economics and a decade of experience in Financial Services. He has worked with HNW investors at Morgan Stanley and consulted RIAs and IARs as a Managing Director of Sales at a boutique Investment Advisor/Fund Distributor. He is now the Head of Sales and Marketing for Measured Risk Portfolios. In his career, Alexander has raised over $500 million in capital for fund and SMA managers across various asset classes and strategy types.

He is a Certified Financial Planner™ issued by the CFP Board, taught in conjunction with NYU School of Professional Studies, and a Certified Investment Management Analyst® issued through the Investment and Wealth Institute, taught in conjunction with Yale University.

For more information, email [email protected].

This article is part of Cboe’s Guest Author Series, where firms and individuals share their insights, strategies and ideas with the broader Cboe community. Interested in contributing? Email [email protected] or contact your Cboe representative to learn more.

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Important Disclosures:

*The "floor on potential losses" refers to the maximum capital lost from call options on the S&P 500 using SPY and ^SPX. Most assets are in a short-duration treasury ladder, considered safe; however, still subject to potential losses.

Measured Risk Portfolios, SMA’s were incepted on October 1st, 2012. The attached Y-Charts report is the MRP Growth strategies returns, represented net-of-fees. This report(s) contains performance history from 2016 – 2023 due to a material change in the strategy’s duration focus, or is reported since common inception. For all MRP strategies' full track records and annual performance, visit the Strategies page of the Measured Risk Portfolios Website.  

It is not possible to invest directly in an index. Benchmark returns in the Y-Charts report are not net of fees. Differences between performance against the S&P 500 ETF SPY and its actual benchmark may occur.

Measured Risk Portfolios, Inc. (MRPI), is an investment adviser registered with the Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information regarding the investment program, including investment management fees, as well as important information regarding MRPI, its services, compensation, and conflicts of interest is contained in the firm’s Form ADV Part 2 and is available upon request or at The purpose of this communication is to provide information on products and services of MRPI and should not be considered investment advice or a recommendation to buy or sell any securities. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. The information provided reflects the views of the authors as of a particular time and are subject to change at any time without notice. Some of the information contained herein has been obtained or is derived from sources prepared by unaffiliated and independent third parties not associated with MRPI. While MRPI believes the information to be reliable for the purposes used herein, MRPI has not independently investigated or verified the accuracy of this information, and does not assume any responsibility for, nor guarantee, the accuracy, adequacy or completeness of any such information.

Strategies related to MRP: MRPI employs various strategies to achieve the objective of limiting losses. The primary tool to achieve this objective is the use of options. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from MRPI, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-888-678-4667). The program is not limited to any asset class and the PM retains discretionary trading authority on all accounts. In no event will the PM engage in “naked” options trading, which is the most speculative form of trading?

Limitations of Past Performance: Possibility of Losses: Past performance does not guarantee future results. Prospective clients should not assume that future performance will be profitable. Participation in this program carries the potential for profit as well as the probability of loss, especially over shorter periods.

Other Fees and Expenses; Impact of Taxes: The investment management fee paid to MRPI is separate and distinct from the internal fees and expenses charged by mutual funds and ETFs to their shareholders. These fees and expenses are described in each fund’s prospectus and will generally include a management fee, internal investment, custodial and other expenses, and a possible distribution fee. Prospective clients should consider these fees and charges when deciding whether to invest in the program. Performance results for this program do not reflect the impact of taxes. Program accounts may engage in a significant amount of trading. Gains or losses will generally be short-term; consequently, this program may not be suitable for clients seeking tax efficiency.

Comparisons to Indices: The S&P 500 Composite Index (the “S&P 500 Index”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the broader stock market, and includes the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P 500 Index do not reflect the deduction of transaction or custodial charges nor the deduction of an investment management fee, which would decrease historical performance results. Investors cannot invest directly in the S&P 500 Index. The performance of the S&P 500 Index is provided solely for comparison purposes and does not imply that the program seeks to match or outperform the index over time.

Y- Charts MPT 60/40 Benchmark Performance Disclosure

This benchmark was created by combining a 60% position in SPY and a 40% position in AGG and is not a standard benchmark.


OF, AN ACTUAL ACCOUNT. THIS REPORT SHOWS HYPOTHETICAL OR SIMULATED RETURNS OF PORTFOLIO(S) AND IS FOR ILLUSTRATIVE PURPOSES ONLY. This report is not intended to and does not predict or show the actual investment performance Of any account. A portfolio represents an investment in a hypothetical weighted blend of securities which, together with other inputs, were selected by you and/or your Adviser and, accordingly, a portfolio should be used for illustrative purposes only.

Risks and Limitations of Hypothetical Performance

HYPOTHETICAL AND SIMULATED PORTFOLIO RETURNS SHOULD NOT BE CONSIDERED PERFORMANCE REPORTING. NO representation is made that your investments will achieve results similar to those shown, and actual performance results may differ materially from those shown. Returns portrayed in this report do not reflect actual trading and investment activities but are hypothetical or simulated results of a hypothetical portfolio over the time period indicated and do not reflect the performance of actual accounts managed by your Adviser or any other person. The mutual funds and Other components Of the hypothetical portfolio(s) were selected with the full benefit Of hindsight, after their performance during the time period was known. In general, hypothetical returns generally exceed the results of client portfolios actually managed by advisers due to several factors, including the fact that actual portfolio allocations differed from the allocations represented by the market indices used to create the hypothetical portfolios over the time periods shown, new research was applied at different times to the relevant indices, and index performance does not reflect the deduction Of any fees and expenses. Results also assume that asset allocations would not have changed over time and in response to market conditions, which is likely to have occurred if an actual account had been managed during the time period shown.

Criteria and Assumptions Used in Portfolio Performance

All portfolios represent hypothetical blended investments of weighted securities as designated by the creator of this report based on the expected financial situation of the intended audience and should be used for illustrative purposes only and should not be considered performance reports. They are calculated by taking a weighted average of the target weights and the securities total return, assuming all dividends reinvested, since the latest rebalance date. These portfolios are assumed to rebalance to the exact designated weights at each calendar quarter or month end - whichever is chosen when setting up the portfolio. No transaction costs or taxes are included. Portfolio holdings are weighted by percentage, not whole share numbers.