Elastic Asset Allocation — Offensive (EAA-OFF)
Developed by Keller & Butler · Generalized Momentum · Med-High Risk
Elastic Asset Allocation was published by Wouter Keller and Adam Butler in their 2014 SSRN paper (#2543979), advancing the multi-factor approach introduced by FAA into a more mathematically rigorous framework. Where FAA combined rank scores using simple weighted addition, EAA introduces a generalized scoring formula that multiplicatively combines return momentum, correlation, and volatility information into a single composite that Keller termed the "elasticity" score. The offensive variant (EAA-OFF) applies more aggressive parameterization that weights the return component more heavily, producing higher-conviction asset selection at the cost of greater concentration risk.
The elasticity score for each asset is calculated as the product of its return raised to a power, multiplied by a correlation-based diversification adjustment and a volatility-based risk adjustment. The multiplicative structure means an asset must score well across all three dimensions to rank highly — a zero or negative score in any single factor drives the entire composite toward zero. This is fundamentally different from FAA's additive approach, where a very high score in one factor could compensate for weakness in another. EAA's multiplicative framework demands multi-dimensional quality, producing more selective and consistent rankings.
The offensive parameterization emphasizes return momentum more heavily than the defensive variant, using the squared return in the numerator. This squaring amplifies the spread between high and low-momentum assets, creating sharper differentiation and more concentrated allocations in the strongest trends. The correlation factor is calculated as one minus the average correlation of each asset with all other candidates, rewarding assets that stand apart from the crowd. The formula produces score-proportional weights rather than equal weights — assets with higher scores receive proportionally larger allocations, allowing the portfolio to express varying levels of conviction across its holdings.
EAA applies the same seven-asset universe as FAA — US equities (VTI), international developed (VEA), emerging markets (VWO), commodities (GSG), real estate (VNQ), aggregate bonds (BND), and short-term Treasuries (SHY). A breadth-based absolute momentum filter excludes assets with negative multi-period momentum, and the remaining qualifying assets receive score-proportional weights. The defensive allocation shifts to intermediate bonds (IEF) when a sufficient number of assets fail the absolute filter.
How It Works
The Elasticity Score
Each month, every asset in the universe is scored using the formula: z = (1 - Corr) × R², where R represents the asset's trailing return and Corr represents its average pairwise correlation with all other universe members. The squared return term amplifies the differentiation between strong and weak momentum assets, making the offensive variant more aggressive in concentrating toward the highest-momentum positions.
The correlation adjustment (1 - Corr) serves as a diversification multiplier. An asset with zero correlation to the rest of the universe receives a full multiplier of 1.0, while an asset perfectly correlated with everything else would see its score reduced to zero regardless of its return. This mechanism naturally suppresses the rankings of assets that move in lockstep with each other, preventing the portfolio from concentrating in a cluster of highly correlated holdings that would collapse together during a market stress event.
Score-Proportional Weighting
Unlike equal-weight strategies where every selected asset receives the same allocation, EAA allocates capital in proportion to each asset's elasticity score. An asset with a score twice as high as another receives twice the portfolio weight. This proportional weighting allows the portfolio to express varying conviction levels — heavily weighting assets with strong momentum, low correlation, and moderate volatility, while giving smaller allocations to assets that qualify but score less impressively.
This weighting approach produces more concentrated portfolios than equal-weight alternatives. During periods with one dominant trend — such as a strong US equity rally with no comparable momentum elsewhere — the portfolio may allocate forty or fifty percent to the highest-scoring asset. During periods of broad, multi-asset momentum, the weights distribute more evenly. The portfolio's concentration level adapts naturally to the prevailing opportunity set.
Breadth-Based Protection
EAA uses an absolute momentum filter based on the 13612U composite (the unweighted average of one, three, six, and twelve-month returns) to determine which assets qualify for inclusion. Assets with negative 13612U scores are excluded from the ranking. As more assets fail this filter, a proportionally larger share of the portfolio shifts to intermediate bonds (IEF).
This breadth-based defense mechanism operates similarly to PAA's graduated protection: the more assets that show negative absolute momentum, the more defensive the portfolio becomes. During normal markets with most assets trending positively, the defensive allocation is minimal. During widespread weakness, the portfolio progressively increases its bond allocation as successive assets fail the filter. The result is a smooth, proportional defensive response rather than a binary switch.
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