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International Portfolio Choice

In: Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models

Author

Listed:
  • Ben Tims
  • Ronald Mahieu

Abstract

The allocation of securities in an investor’s portfolio is one of the oldest and most investigated problems in modern finance. Most financial studies that address the portfolio allocation problem focus on the issue of determining what the optimal allocation should be given a predefined set of securities and a predefined objective function. From a practitioner’s point of view, the resulting allocations may differ considerably from the existing portfolio allocations. It is well known that the computed optimal allocations are not very stable. See, for example, Best and Grauer (1991) and Black and Litterman (1992), who show that a small change in the mean of an asset return will have a huge impact on the optimal allocation of the portfolio but not on its performance. Therefore, a practitioner may be very cautious in deciding to follow the computed optimal allocations.

Suggested Citation

  • Ben Tims & Ronald Mahieu, 2011. "International Portfolio Choice," Palgrave Macmillan Books, in: Greg N. Gregoriou & Razvan Pascalau (ed.), Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, chapter 4, pages 51-73, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29522-3_4
    DOI: 10.1057/9780230295223_4
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    Keywords

    Serial Correlation; Wald Statistic; Bond Index; Investment Horizon; Wald Test Statistic;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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