Strategic Asset Allocation:

Determining the Optimal Portfolio with Ten Asset Classes

Niels Bekkers Mars,Ronald Q. Doeswijk Robeco, Trevin W. Lam Rabobank The
Netherlands explores which asset classes add value to a traditional portfolio of stocks, bonds
and cash and determine the optimal weights of all asset classes in the optimal portfolio. This
study adds tothe literature by distinguishing ten different investment categories
simultaneously in a mean-variance analysis as well as a market portfolio approach. It also
demonstrate how to combine these two methods. Our results suggest that real estate,
commodities and high yield add most value to the traditional asset mix. Our mean-variance
analysis suggests that real estate, commodities and high yield add most value to the
traditional asset mix of stocks, bonds and cash. Basically, adding these three asset classes
comes close to an all asset portfolio. The portfolio with all assets shows a diversification
benefit along the efficient frontier that varies between 0.40% and 0.93% in the volatility
range of 7% to 20%. That is an economically significant extra return for free. Another
approach to the asset allocation problem is assessing the weights of the asset classes in the
market portfolio. Based on this analysis we conclude that the proportion of non-traditional
asset classes appearing in the market portfolio is relatively small.
Rainer Baule A direct application of classical portfolio selection theory is problematic for
the small investor because of transaction costs in the form of bank and broker fees. An
empirical study shows that, for smaller investment volumes, transaction costs dominate risk
costs so that optimal portfolios contain only a very small number of assets. Based upon these
results, the cost-effectiveness of direct investments is compared to alternative vehicles. They
analyzed the resulting optimization problem by reformulating it as the minimization of the
sum of two types of costs: the transaction costs and the risk costs. Risk costs arise when
bearing unsystematic risk, which is unavoidable if the portfolio differs from the optimal
portfolio in classical Markowitz theory. Because of transaction costs, however, the small
investor seeks to reduce the number of assets to a level below that of the classically optimal
portfolio. The empirical investigation shows that transaction costs can lead to a very small
optimum for the number of stocks in the portfolio. Our analysis also provides guidelines for
choosing between direct investments in stocks or in alternative vehicles. Direct investment is
advantageous if the sum of associated risk and transaction costs is For instance, if the investor
has private information believed to make it possible to outperform the market, a passive
index investment is not appropriate.
Hamid Z. Ahmadi, Janna Khoroujik, Rafiqul B. Rafiq, California State University,
Sacramento examines the performance of portfolios that were aggressively managed and
compares their risk adjusted returns with those of portfolios that were managed infrequently.
To accomplish this, we change the rebalancing frequency of a well-diversified portfolio and
track its performance over time. This study will not only enable us to determine whether the
performance of an actively -managed portfolio surpasses the performance of an under-
managed or unmanaged portfolio, but it will also allow us to determine the optimal
rebalancing period for maximizing risk-adjusted returns. The asset selection and portfolio
optimization methodologies applied to the portfolios in this study are identical to maintain
consistency and comparability of results. This work applied different rebalancing frequencies
to a well-diversified portfolio and compared the risk adjusted returns achieved with each of
these frequencies. The results indicate that a quarterly -rebalanced portfolio will outperform a
portfolio that is rebalanced more frequently. They conclude that the optimal rebalancing
frequency is quarterly.
Harald Lohre, Thorsten Neumann, Thomas Winterfeldt, HSH Nordbank, Kie
Portfolio construction techniques seek an optimal trade-off between the portfolios mean
return and the associated risk. Our empirical results indicate that downside portfolio risk is
reduced for most of the investigated measures. Our results indicate that portfolio
optimization techniques may successfully reduce asymmetric risk when compared to a
strategy of buying and holding a benchmark portfolio. Another important finding is that
predictability of alternative risk measures is key for their implementation in portfolio
optimization processes. Our empirical evidence suggests that skewness measures are highly
unstable over time. This observation even holds for a more robust estimator of skewness with
regard to outliers. As a consequence, we fail to predict skewness risk properly and
optimization fails to reduce skewness risk ex post. To summarize, alternative risk measures
do a good job in portfolio optimization.
Karen Benson, Philip Gray, Egon Kalotay, Judy Qiu explores the potential usefulness of
non-parametric approach to portfolio construction and performance measurement recently
proposed by Stutzer (2000). The Portfolio Performance Index (PPI) is based on the notion
that investors associate risk with the failure to achieve a target return.. By comparing the PPI
and Sharpe ratio metrics, the impact of such on portfolio construction and performance
evaluation practice. The intuition behind the PPI is straight forward and easily interpreted by
professional and lay investors alike. Optimal stock weightings are shown to differ marginally
under the PPI and Sharpe ratio metrics, thus providing an indication of the economic
significance of return deviations from normality. The characteristics of the resulting
portfolios differ notably. This paper’s findings of differences in the composition of optimal
portfolios and ranking of funds under alternate metrics is not surprising.
Syed Tabassum Sultana, this paper discusses the characteristics of the Indian individual
investors and also makes an attempt to discover the relationship between Risk tolerance level
and other variables such as age, gender of an individual investor while investing in a mutual
fund. The data for this study was collected by means of a questionnaire. It was carried out
with a sample size of 150 investors. Based on the responses of the questionnaire it was found
that the mutual fund market was dominated by the male investors and majority of them
preferred to invest in financial products which gave risk free returns. This also suggested that
Indian individual investors preferred to be on the safer side eve if they belonged to the high
income and salaried category of investors.

Sarika Mahajan, Balwinder Singh explores the movement in stock market, the index values
can’t be decided only on the basis of prices. Stock prices without associated with trading
volume convey vague information about market activity. It examines the empirical
relationship between return, volume and volatility dynamics of stock market by using daily
data for the Sensitive Index (SENSEX) of Bombay Stock Exchange, India’s premier stock
exchange. A main issue has been whether information about trading volume is useful in
improving the forecasts of return and return volatility in dynamic context. The empirical
analysis provides evidence of positive and significant correlation between volume and return
volatility that is indicative of the both mixture of distribution and sequential arrival
hypothesis of information flow.
Serkan Yilmaz Kandir Macroeconomic variables used in this study are, growth rate of
industrial production index, change in consumer price index, growth rate of narrowly
defined money supply, change in exchange rate, interest rate, growth rate of international
crude oil price and return on the MSCI World Equity Index. The analysis is based on stock
portfolios rather than single stocks. In portfolio construction, four criteria are used: market
equity, the book-to market equity, the earnings-to-price equity and the leverage ratio. A
multiple regression model is designed to test the relationship between the stock portfolio
returns and seven macroeconomic factors. Empirical findings reveal that exchange rate,
interest rate and world market return seem to affect all of the portfolio returns, while inflation
rate is significant for only three of the twelve portfolios. On the other hand, industrial
production, money supply and oil prices do not appear to have any significant affect on stock
returns. Empirical findings reveal that exchange rate, interest rate and world market return
seem to affect all of the portfolio returns, while inflation rate is significant for only three of
the twelve portfolios. The findings also suggest that macroeconomic factors have a
widespread effect on stock returns, since characteristic portfolios do not seem to be
influenced in a different manner by the macroeconomic variables. Overall, this paper is
expected to be useful for both stock investors and finance literature.

Michael J. Stutzer This paper models the behaviour of a fund manager who selects a
portfolio strives to maximize the probability of outperforming an investor-designated
benchmark portfolio, on-average, over an uncertain length of time. Surprisingly, the analysis
shows that the manager should act as-if she maximizes the expected exponential utility of the
portfolio's excess return over the benchmarks. But unlike standard portfolio theory, this
manager should maximize expected utility over both the space of portfolios and the utility
function's coefficient of risk aversion. Nonetheless, the result is consistent with the usual
Sharpe Ratio maximization rule when returns are normally distributed. More realistically,
returns are from some unknown distribution. Fortunately, the optimal coefficient of risk
aversion and portfolio are easily estimable in this case, using a simple spreadsheet.

Andrea Buraschi, Paolo Porchia, And Fabio Trojani The model gives rise to simple
optimal portfolio solutions that are available in closed-form. We use these solutions to
investigate, in several concrete applications, the properties of the optimal portfolios. We find
that the hedging demand is typically four to five times larger than in univariate models and it
includes an economically significant correlation hedging component, which tends to increase
with the persistence of variance covariance shocks, the strength of leverage effects and the
dimension of the investment opportunity set. These findings persist also in the discrete-time
portfolio problem with short-selling or VaR constraints. The multivariate nature of second
moments in our model has important consequences for optimal asset allocation: Hedging
demands are significantly different from and typically four to five times larger than those of
models with constant correlations or single-factor stochastic volatility. They include a
substantial correlation hedging component, which tends to increase with the persistence of
variance covariance shocks, the strength of leverage effects and the dimension of the
investment opportunity set. These findings also exist when we consider exact discrete-time
versions of our setting with short-selling or VaR constraints.
Block, Stanley B. and French, Dan W. (2000) conducted a study on Portfolios of equity
mutual funds tend to be equally weighted to a greater degree than they are value weighted
according to metrics of fund weightedness developed in this paper. Measures of fund
investment performance based solely on a single value-weighted or equally weighted
benchmark may therefore not adequately identify significant excess performance. We
propose a two-index model using both a value-weighted and an equally weighted index.
Estimated models using a sample of 506 mutual funds show that the two-index model
provides a better fit than the single-index model and identifies a larger set of funds with
abnormal performance.

Feijoo Colomine Duran, Carlos Cotta and Antonio J. Fern´andez Portfolio optimization
is a problem that lends itself naturally to multiobjective approaches, e.g., aimed to maximize
the return of the investment, simultaneously minimizing the risk. The selection of an actual
portfolio requires exercising a decision-making process on the set of efficient solutions thus
obtained. Portfolio optimization is a natural arena for multiobjective optimizers, which are
both powerful and flexible enough to deal with this kind of problems. This is specifically true
if the optimization process is done in absence of knowledge on the particular decision-
making process that will take place afterwards, in order to select a solution from the Pareto
front.