International Portfolio Choice

Ben Tims and Ronald Mahieu

Chapter 4 in Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, 2011, pp 51-73 from Palgrave Macmillan

Abstract: Abstract The allocation of securities in an investor’s portfolio is one of the oldest and most investigated problems in modern finance. Most financial studies that address the portfolio allocation problem focus on the issue of determining what the optimal allocation should be given a predefined set of securities and a predefined objective function. From a practitioner’s point of view, the resulting allocations may differ considerably from the existing portfolio allocations. It is well known that the computed optimal allocations are not very stable. See, for example, Best and Grauer (1991) and Black and Litterman (1992), who show that a small change in the mean of an asset return will have a huge impact on the optimal allocation of the portfolio but not on its performance. Therefore, a practitioner may be very cautious in deciding to follow the computed optimal allocations.

Keywords: Serial Correlation; Wald Statistic; Bond Index; Investment Horizon; Wald Test Statistic (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1057/9780230295223_4

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