Asset allocation (Reading 26)

Paper by BHB in 1986 (Brinson, Hood and Beebower):

Strong evidence thru regression that portfolio performance is 93% explained by asset allocation (the portfolio policy of % dedicated to stocks, sectors in stocks, bonds and cash); and maybe 7% by individual managers' skills.

Made asset allocation strategy a big deal compared to individual; not challenged seriously till 1997 (William Janke)

ALM (Asset / liability mangement): Explicitly model liabilities and find optimal asset allocation to meet those liabilities over the desired time period.
(Ensure matching)

Static vs dynamic: Dyanmic takes inter - period linkages into account whereas static is more like a single period allocation. However applying dynamic ALM could be quite expensive...

Risk objectives and strategic asset allocation:

Investor's expected utility Um =
E(Rm) - 0.005Ra *(sigma)2
(expected return - risk aversion * variance of the return for mix m)


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Safety first ratio
Utility adjusted return
Sharp ratio
Sortino ratio

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Black Litterman MVO: First have estimations of different asset types expected returns.
Add to those : the investor's expectations...and his confidence in his abilities.

Use the new expected returns in the MVO model to get the right asset weights.

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Resampled efficient frontier: values from multiple efficient frontiers.

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corner portfolio concepts in mv optimization...