This document discusses four asset allocation strategies:
1. Integrated asset allocation considers capital market conditions and an investor's objectives to determine the optimal asset mix.
2. Strategic asset allocation establishes a long-term policy allocation that is regularly rebalanced, such as always reverting to a 60% stock/30% bond/10% cash mix.
3. Tactical asset allocation makes short-term adjustments assuming mean reversion and above-average returns to exploit changes in market conditions.
4. Insured asset allocation also makes short-term adjustments based on changes in an investor's objectives and risk tolerance.
This document discusses four asset allocation strategies:
1. Integrated asset allocation considers capital market conditions and an investor's objectives to determine the optimal asset mix.
2. Strategic asset allocation establishes a long-term policy allocation that is regularly rebalanced, such as always reverting to a 60% stock/30% bond/10% cash mix.
3. Tactical asset allocation makes short-term adjustments assuming mean reversion and above-average returns to exploit changes in market conditions.
4. Insured asset allocation also makes short-term adjustments based on changes in an investor's objectives and risk tolerance.
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Attribution Non-Commercial (BY-NC)
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This document discusses four asset allocation strategies:
1. Integrated asset allocation considers capital market conditions and an investor's objectives to determine the optimal asset mix.
2. Strategic asset allocation establishes a long-term policy allocation that is regularly rebalanced, such as always reverting to a 60% stock/30% bond/10% cash mix.
3. Tactical asset allocation makes short-term adjustments assuming mean reversion and above-average returns to exploit changes in market conditions.
4. Insured asset allocation also makes short-term adjustments based on changes in an investor's objectives and risk tolerance.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
1. 2. 3. 4. What asset classes to consider for investment What normal or policy weights to assign to each eligible class The allowable allocation ranges based on policy weights What specific securities to purchase for the portfolio
85% to 95% of the overall investment return is due to the first two decisions, not the selection of individual investments
Asset Allocation Strategies
Integrated asset allocation capital market conditions investors objectives and constraints
Strategic asset allocation
constant-mix
Tactical asset allocation
mean reversion inherently contrarian
Insured asset allocation
constant proportion portfolio insurance
Integrated asset allocation
Investor Assets, Liab., Net Worth (I1) Investor Risk Tolerance Function (I2) Investors Risk Tolerance (I3)
Used to develop a long-term policy allocation Example: Portfolio will always rebalance to revert to a 60% Stock/30% Bond/10% Cash allocation Practical issues: Frequency of rebalancing Reevaluation of the policy allocation ex. Northeasterns endowment
Tactical asset allocation
Used to develop short-term strategies to exploit changes in market conditions Often viewed as a contrarian strategy Assume asset class performance is mean-reverting if stocks have performed above average relative to bonds, underweight stocks and overweight bonds for next period
Assume stocks will generate above average returns
overweight stocks!
Practical issues: Frequency of rebalancing Constraints on swing component
Insured asset allocation
Used to develop short-term strategies to exploit changes in investors objectives and constraints This is a portfolio insurance strategy Assumes investors become more risk-tolerant as wealth rises if stocks have performed above average relative to bonds, overweight stocks for next period
Assumes investors become less risk-tolerant as wealth falls
If stocks have performed poorly, underweight in next period
Practical issues: Frequency of rebalancing Liquidity
Which Allocation Strategy is Best?
Define $ invested in stocks (S)
S = m(A - F) where A = total asset value F = floor value for assets m = multiplier B = $ invested in riskless bonds (=A-S)
Three Strategies (A=100):
Buy and Hold Constant Mix Portfolio Insurance (m=1, F=40) (m=.6, F=0) (m=2, F=70)