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A Strategic Asset Allocation Methodology Using Variable Time Horizon

In: Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds

Author

Listed:
  • Paulo Maurício F. Cacella
  • Isabela Ribeiro Damaso
  • Antônio Francisco Silva

Abstract

Strategic asset allocation is usually the single most important decision that determines the total return performance of a portfolio. This decision can be made using a plethora of distinct methodologies that are well known in the literature and among practitioners. The typical approach uses a standard Markowitz model or a similar one based on a double objective quadratic optimization. The optimal portfolio can be obtained by defining risk preferences with intended restrictions, asset return and risk expectations and investment time horizon. Sometimes, additional tools like stress testing are used to extend the restriction framework. However, only a small set of investor’s preferences can be represented with standard models. As preferences tend to be multiple and even conflicting, a more complex framework is necessary to reflect them properly.

Suggested Citation

  • Paulo Maurício F. Cacella & Isabela Ribeiro Damaso & Antônio Francisco Silva, 2010. "A Strategic Asset Allocation Methodology Using Variable Time Horizon," Palgrave Macmillan Books, in: Arjan B. Berkelaar & Joachim Coche & Ken Nyholm (ed.), Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, chapter 5, pages 93-111, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-25129-8_5
    DOI: 10.1057/9780230251298_5
    as

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