Intelligent tactical asset allocation support system

Y. Hiemstra
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Y. Hiemstra: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 13, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: This paper presents an advanced support system for Tactical Asset Allocation. Asset allocation explains over 90% of portfolio performance (Brinson, Hood and Beebower, 1988). Tactical asset allocation adjusts a strategic portfolio on the basis of short term market outlooks. The system includes a prediction model that forecasts quarterly excess returns on the S&PSOO, an optimization model that adjusts a user-specified strategic portfolio on the basis of the excess return forecast, and a component to simulate and evaluate tactical asset allocation policies using historic data. Each model is based on a proven concept and implemented with state-of-the-art technology. The support system is easy to use, and simulations on nearly 20 years of market data demonstrate its added value. The quarterly adjustments recommended by the system generate an investment strategy with higher expected return and lower volatility as a buy-and-hold strategy of the strategic portfolio, while managing active risk.

Date: 1995
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