EDHEC-Risk - Review of Current Research

Review of Current Research


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Asset Allocation

On the information ratio of tactical asset allocation

Mark Lundin. In this article, the author first recalls the principles of asset allocation. Asset allocation involves choosing the proportion of the portfolio to invest in each asset class. Large asset classes include stocks, bonds, real estate and cash. These asset classes can be further divided into narrower sub-classes. Diversification among asset classes enables a better compromise between portfolio risk and return to be obtained. Asset allocation consists of strategic asset allocation, which concerns long-term allocation, and tactical allocation, which consists of modifying the portfolio's asset class weights on a short-term basis. In the remainder of the article, the author only considers the problem of tactical asset allocation and, more especially, the value added by tactical asset allocation. More...

23/04/04

Asset Allocation

A Stylized Fact of Asset Allocation

Kevin C.H. Chiang. This article compares the asset allocation revision of aggressive and conservative portfolios. The portfolios are assumed to be made up of stocks, bonds and cash, with a greater proportion of bonds relative to stocks for the conservative ones. One of the most popular models used to derive portfolio asset allocation is Markowitz’s mean variance model, which is based on a one-period horizon. According to this model, the proportion allocated to common stocks is linearly related to risk aversion. As a result, in case of revisions concerning the returns distribution, a portfolio manager should rebalance common stocks in the same proportion whether for an aggressive or a conservative portfolio. However, this does not seem to accord with the case in practice. More...

20/02/04

Asset Allocation

The Real-Time Predictability of the Size and Value Premium in Japan

Rob Bauer, Jeroen Derwall, Roderick Molenaar. Previous studies have identified differences in returns between stocks that belong to different styles. A size effect has been observed in the United States by Banz (1981), while Fama and French (1992, 1998) and Lakonishok, Schleifer and Vishny (1994) have described a value effect: there is a negative relationship between a firm’s market capitalization and its stock performance; value stocks provide higher average returns than growth stocks. However, the performance of the different styles appears to be subject to cycles. More...

19/12/03

Asset Allocation

Investing for the Short Run when Return Volatility is Predictable

Leping Wang. The evidence of stock return predictability described in numerous studies has led to a search for the influence of this predictability on dynamic portfolio choice, and particularly if the optimal proportion invested in risky assets differed depending on whether investors had a long or short investment horizon. This later aspect is called the horizon effect. Previous studies were concerned with the problem of hedging the portfolio by choosing its composition according to the correlation between asset returns. In this article, Wang underlines the fact that the mean reversion of the return volatility may also influence an investor’s optimal portfolio choice. More...

02/10/03

Asset Allocation

Is Value Riskier than Growth?

Ralitsa Petkova, Lu Zhang. Value stocks appear to have higher returns than growth stocks. The explanation for this difference has been the subject of numerous studies, using different methods of investigation, to find out whether there is a risk premium for value stocks. Some of the results are controversial. In this article Petkova and Zhang study the relative risk of value and growth stocks in relation to the economic situation. They refer to the findings of previous studies and compare them with their own results, giving the reasons for the differences. The approaches used in the different studies are of two kinds. Some rely on rational asset pricing theory, while others use arguments from behavioral finance. More...

29/09/03

Asset Allocation

The Predictive Ability of the Bond Stock Earnings Yield Differential in World-wide Equity Markets

Klaus Berge, William T. Ziemba. For several years, numerous articles in the financial literature have shown evidence that stock returns are partly predictable. The first studies relied on past returns. It was then demonstrated that financial and accounting variables were able to predict returns. Specifically, interest rates and E/P ratios were identified as important variables in predicting returns. Berge and Ziemba note that only a few studies have employed these two variables together. In fact, the spread between interest rates and E/P ratios appears to be a type of variable that is widely used by practitioners, though little can be found about it in the literature. In this article, the authors first describe why this type of measure is interesting from a theoretical point of view. More...

28/08/03

Asset Allocation

Predicting Returns with Financial Ratios

Jonathan Lewellen. Predicting returns has been a subject of interest for a long time. Initial tests used past returns to predict future asset prices, such as those conducted by Kendall (1953). Later on, additional variables were considered, including dividend yield (DY), book-to-market (B/M) and the earnings-price ratio (E/P). These variables appear to be of particularl interest in predicting asset returns, as they should be positively related to expected returns. However, empirical studies have concluded that their power to predict returns was weak. In this article, Lewellen argues that this can result from the correction of biases. More...

24/06/03

Asset Allocation

Style Switching and Stock Returns

Alok Kumar. Investment managers are becoming increasingly concerned by style investing, as demonstrated by recent studies. This article begins by giving an overview of what style investing is and then describes how this type of investing, when massively followed by investment managers, can influence stock returns. Style investing consists of constructing portfolios by choosing assets according to the style they belong to. The mutual funds industry is now offering funds that follow the different styles. More...

19/06/03

Asset Allocation

A Note on the Three-Portfolios Matching Problem

Fabio Trojani, Paolo Vanini, Luigi Vignola. This article considers the problem of deriving the optimal portfolio of a private investor. It is assumed that the investor initially holds a portfolio. The objective is to modify this portfolio so that it is as close as possible to the portfolio recommended by the consulting process, using the universe of instruments available to the investor, while minimizing the transaction costs and taking the investor constraints into account. This problem is given the term of the three-portfolios matching problem (TPMP). More...

05/06/03

Asset Allocation

International TAA Strategies and Currencies

Elmar Mertens, Heinz Zimmermann. International portfolio managers have to decide whether or not to hedge their portfolio and how to perform this hedging. This aspect of portfolio management is related to strategic asset allocation. The value added by tactical asset allocation and the benefits of international investment in improving portfolio performance have often been considered in separate studies. In this article, Mertens and Zimmerman describe different ways of integrating currency allocation in the investment process and their effect on portfolio performance. More...

23/05/03

Asset Allocation

Does Active Trading Create Value? An Evaluation of Fund Managers' Decisions

Stefan Engström. The problem of mutual fund performance evaluation has been extensively described in the literature. This article initially goes back over the measures and decompositions that were developed previously. Most of these models consider the aggregation of portfolio asset returns, like, for example, Treynor and Mazuy (1966) and Henriksson and Merton (1981) who proposed decomposing fund performance into stock selectivity and market timing ability. More...

23/05/03

Asset Allocation

On the Estimation of the Global Minimum Variance Portfolio

Alexander Kempf, Christoph Memmel. In view of the difficulties in estimating expected returns, this article indicates the usefulness of the only efficient portfolio whose weights are independent from these estimations. This portfolio is the minimum variance portfolio, which has already been the object of several developments. The authors begin by analysing the specific properties of the true global minimum variance portfolio, the one that can be computed if the true return distribution parameters are known. They show the close link between the global minimum variance portfolio and linear regression theory. This makes it possible to use the Ordinary Least Squares (OLS) method to estimate the weights of the global minimum variance portfolio. More...

15/05/03

Asset allocation

Risk Management for Hedge Fund Portfolios. A Comparative Analysis of Linear Rebalancing Strategies

Pavlo Krokhmal, Stanislav Uryasev, Grigory Zrazhevszky. This article compares several risk management methods for portfolios of hedge funds and considers the problem of constructing optimal funds of hedge funds. More...

01/02/03

Asset Allocation

The Benefits of Rebalancing

Gerard W. Buetow, Jr., Ronald Sellers, Donald Trotter, Elaine Hunt, Willie A. Whipple, Jr. . Managing a portfolio presupposes that target asset allocation weights have been initially defined. The portfolio will then encounter weighting drifts compared to the allocation. The problem for managers is to decide when to rebalance their portfolios to correct these drifts, without losing added value, for example, through transaction costs. More...

01/11/02

Asset Allocation

The Small-Cap Alpha Myth

Richard M. Ennis, Michael D. Sebastian. Small-cap stocks are believed to offer greater expected returns than large-cap stocks, because the market is supposed to be less efficient for small stocks than for large ones. The article explains that this opinion is in fact due to performance misevaluation. More...

01/11/02

Asset Allocation

Rebalancing a Global Policy Benchmark

Lisa M. Plaxco, Robert D. Arnott. It is necessary to rebalance a portfolio to compensate for the drifts from the benchmark. Drifts can produce superior performance during certain periods, but they also modify the risk of the portfolio. This article compares various methods of portfolio rebalancing in order to control risk and generate alphas. More...

01/11/02


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