Wealth management: The relative importance of asset allocation and security selection

Walter Hlawitschka and Michael Tucker ()
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Walter Hlawitschka: Dolan School of Business, Fairfield University
Michael Tucker: Dolan School of Business, Fairfield University

Journal of Asset Management, 2006, vol. 7, issue 1, No 6, 49-59

Abstract: Abstract Many studies have suggested that being in the ‘right’ asset category is more important than being in the right asset, ie asset allocation is more important than security selection. Brinson et al. (Financial Analysts Journal, 47(3), 40–48, 1991), for example, claim that approximately 91 per cent of certain portfolio returns can be attributed to the portfolio's asset allocation. This paper differs from earlier studies in that a portfolio's attractiveness is measured based on the ex ante expected utility that an investor associates with a specific portfolio. Most other studies measure a portfolio's attractiveness based on comparisons of ex post results, when it is too late for investors to make their investment choice. The results are very different from those of earlier studies. Portfolios comprising an optimal mix of stock and bond indexes provide much less expected utility than a portfolio comprising an optimal mix of specific stocks and specific bonds. Thus, security selection is found to be far more important than asset allocation.

Keywords: asset allocation; optimal portfolio; security selection; utility maximisation; ex ante returns (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1057/palgrave.jam.2240201

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