Timing and diversification: Required information coefficients for tactical asset allocation

N French (), J W Kay () and Charles Ward
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N French: The University of Reading
J W Kay: Senior Lecturer in the Department of Statistics at the University of Glasgow

Journal of Asset Management, 2000, vol. 1, issue 1, No 5, 60-71

Abstract: Abstract Previous research into market timing has been concerned with measuring investment performance of a portfolio when the manager of the portfolio has market timing ability. This paper seeks to analyse the problem from the manager's perspective by determining how accurate the manager has to be before market timing would be successful. This paper presents an analytical solution that may be applied to different assets or markets. We follow previous work in defining the fund manager's problem as forecasting whether the return from one asset will be higher or lower than the return from another. It is then assumed that the fund manager's entire portfolio will be switched in to the asset with the highest expected return. The analysis provides insight to the problem of market timing through its setting in mean-variance space. It thus facilitates the analysis of timing possibilities with two risky markets or assets in a context common with portfolio selection.

Keywords: portfolio management; asset allocation; timing; forecasting (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1057/palgrave.jam.2240005

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