QUANTIFYING ASSET ALLOCATION

摘要

Our study focuses on the quantification of asset allocation decisions, which is often modeled as a twosecurity,rnmean-variance optimization. Our study shows that mean-variance optimization fails in thisrnparticular case. Weights obtained this way depend exclusively on returns because two linear constraintsrn(weights adding to one and the return constraint) fully characterize the two-dimensional solution. It isrnbetter to characterize asset allocation as a three-security (a money market, a bond fund, and a stock fund)rnmean-variance optimization problem. Still, bond holdings may reflect cash-flow matching objectivesrnthat are not included in mean-variance set ups. This and other factors such as risk managementrnalternatives, asset classification problems, etc., indicate that the asset allocation decision may better bernstudied with alternative methodologies such as approximate equations or qualitative (symbolic algebrabased)rnanalysis.