A Study of the Effectiveness of Asset Allocation Under Extreme Macro Shocks: a Comparative Analysis Based on the Efficient Frontier Before and after the COVID-19 Pandemic

As a typical macro-extreme shock event, the COVID-19 pandemic has a significant impact on global financial markets. Based on the Markowitz model, this study compares and analyses the changes in the effective frontier and the minimum variance frontier of assets before and after the epidemic, aiming to assess the effectiveness of asset allocation under extreme shocks. Daily data of 21 stocks from five sectors, the S&P500 index and the risk-free rate, aggregated into monthly returns between 2017 and 2023, are used for modelling. The results of the study show that the effective frontier shifted significantly to the lower right during the epidemic, indicating a significant increase in risk at the same level of return, a decrease in expected return at the same level of risk, and an overall deterioration in the price/performance ratio of the investment; and an overall shift to the right and a narrowing of the vertical range of the minimum variance frontier reflecting an increase in the overall risk of the market and a tightening of the distribution of returns. This study confirms the negative impact of extreme macro shocks on the efficiency of asset allocation and provides empirical references for risk management and asset portfolio construction under extreme situations.