A Strategic Asset Allocation Methodology Using Variable Time Horizon

Paulo Maurício F. Cacella, Isabela Ribeiro Damaso and Antônio Francisco Silva

Chapter 5 in Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, 2010, pp 93-111 from Palgrave Macmillan

Abstract: 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.

Keywords: Time Horizon; Pareto Front; Multiobjective Optimization; Portfolio Selection; Risk Preference (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-25129-8_5

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DOI: 10.1057/9780230251298_5

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