Global Portfolio Diversification For Long Horizon Investors
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| Author | : Luis M. Viceira |
| Publisher | : |
| Total Pages | : 78 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
This paper conducts a theoretical and empirical investigation of the risks of globally diversified portfolios of stocks and bonds and of optimal intertemporal global portfolio choice for long horizon investors in the presence of permanent cash flow shocks and transitory discount rate shocks to asset values. We show that an upward shift in cross-country one-period return correlations resulting from correlated cash flow shocks increases the risk of global portfolios and reduces investors' willingness to hold risky assets at all horizons. However, a similar upward shift in cross-country one-period return correlations resulting from correlated discount rate shocks has a much more muted effect on long-run portfolio risk and on the willingness of long horizon investors to hold risky assets. Correlated cash flow shocks imply that markets tend to move together at all horizons, thus reducing the scope for global diversification for all investors regardless of their investment horizon. By contrast, correlated discount rate shocks imply that markets tend to move together only transitorily, and long-horizon investors can still benefit from global portfolios to diversify long-term cash flow risk. We document a secular increase in the cross-country correlations of stock and government bond returns since the late 1990s. We show that for global equities this increase has been driven primarily by increased cross-country correlations of discount rate shocks, or global capital markets integration, while for bonds it has been driven by both global capital markets integration and increased cross-country correlations of inflation shocks that determine the real cash flows of nominal government bonds. Therefore, despite the significant increase in the short-run correlation of global equity markets, the benefits from global equity portfolio diversification have not declined nearly as much for long-horizon investors as they have for short-horizon investors. By contrast, increased correlation of inflation across markets implies that the benefits of global bond portfolio diversification have declined for long-only bond investors at all horizons. However, it also means that the scope for hedging liabilities using global bonds has increased, benefiting investors with long-dated liabilities. Finally, we show that the well documented negative stock-bond correlation in the U.S. since the late 1990s is a global phenomenon, suggesting that the benefits of stock-bond diversification have increased in all developed markets.
| Author | : Luis M. Viceira |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
This paper conducts a theoretical and empirical investigation of global portfolio diversification for long-horizon investors in the presence of permanent cash flow shocks and transitory discount rate shocks to asset prices and returns. An increase in the cross-country correlations of cash flow shocks raises the risk of a globally diversified portfolio at all horizons. By contrast, an increase in the cross-country correlations of discount rate shocks has a muted effect on portfolio risk at long horizons and does not diminish the benefits of global portfolio diversification to long-term investors. Empirically, we find that increased correlations of discount rate shocks resulting from financial globalization appear to be the main driver of an estimated secular increase in the cross-country correlations of both stock and bond returns since the late 1990s. Increased correlations of inflation shocks are also an important source of the shift in bond correlations. By contrast, we don't find evidence of an increase in the cross-country correlations of equity cash flow news or stock market volatility shocks. Our findings imply that the benefits of global equity diversification have not declined for long horizon investors despite the secular increase in global stock correlations, while the benefits of global bond diversification have declined.
| Author | : Mattias Persson |
| Publisher | : |
| Total Pages | : 22 |
| Release | : 2002 |
| Genre | : |
| ISBN | : |
The gains from international diversification are a well-established fact. In this study a non-parametric moving block bootstrap is used to investigate if investors with long investment horizons should tilt their portfolio weights towards the international stock markets. Through this approach we are able to study the impact of estimation risk on the optimal weights in the assets, and over the investment horizons. The analysis shows that the investors gain more from internationally diversified portfolios if the investment horizon is longer, that is, the weight in the international assets are significantly higher for long investment horizons compared to the one-year horizon.
| Author | : Martin L. Leibowitz |
| Publisher | : Wiley |
| Total Pages | : 352 |
| Release | : 2010-02-25 |
| Genre | : Business & Economics |
| ISBN | : 0470608420 |
A cutting-edge look at the endowment model of investing Many larger endowments and foundations have adopted a broadly diversified asset allocation strategy with only a small amount of traditional U.S. equities and bonds. This technique, known as the "endowment model of investing," has demonstrated consistent long-term performance and attracted the attention of numerous institutional and individual investors. With The Endowment Model of Investing Leibowitz, Bova, and Hammond take a closer look at the endowment model with customary research sophistication and attention to detail. Throughout the book, they examine how the model provides truly outstanding real returns, while keeping a close eye on the risks associated with this method of investing. Along the way, the authors offer practical advice on incorporating the endowment model into your own investment endeavors and reveal what it takes to make this method work in the real world. Details the growing debate about the endowment model of investing and discusses how to use it successfully Written by an authority on endowment investing and non-traditional asset allocation strategies Offers expert insights on understanding risk and return in non traditional asset allocation If you want to gain a better grasp of one of the most successful forms of investing, then The Endowment Model of Investing is a book you need to read.
| Author | : Chaehee Shin |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
Although the lack of international portfolio diversification has long interested the financial economics literature, the role of financial intermediaries in the market for diversified portfolios has rarely been studied. In this paper, I introduce a microeconomic aspect of under-diversification by examining a new data on U.S.-based mutual fund families' global diversification. I document the fund families' investments in global equity markets and explore features of supply and demand in the mutual fund market to explain their limited global diversification. Demand estimation confirms that consumers are not only sensitive to the fund families' portfolio characteristics such as global diversification, but also to the non-portfolio characteristics such as fund family age and size. On the supply side, the model of fund families' global investment decisions uses a revealed preference approach and shows small cross-border investment frictions can justify the fund families' observed limited global diversification. Other factors such as destination country's investor protection level and fund family's investment experience significantly affect the degree of diversification as well.
| Author | : John Y. Campbell |
| Publisher | : OUP Oxford |
| Total Pages | : 272 |
| Release | : 2002-01-03 |
| Genre | : Business & Economics |
| ISBN | : 019160691X |
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
| Author | : Pranay Gupta |
| Publisher | : John Wiley & Sons |
| Total Pages | : 296 |
| Release | : 2016-03-09 |
| Genre | : Business & Economics |
| ISBN | : 1119241596 |
Despite the accepted fact that a substantial part of the risk and return of any portfolio comes from asset allocation, we find today that the majority of investment professionals worldwide are focused on security selection. Multi-Asset Investing: A Practitioner’s Framework questions this basic structure of the investment process and investment industry. Who says we have to separate alpha and beta? Are the traditional definitions for risk and risk premium relevant in a multi-asset class world? Do portfolios cater for the ‘real risks’ in their investment processes? Does the whole Emerging Markets demarcation make sense for investing? Why do active Asian managers perform much poorer compared to developed market managers? Can you distinguish how much of a strategy’s performance comes from skill rather than luck? Does having a performance fee for your manager create alignment or misalignment? Why is the asset management transitioning from multi-asset strategies to multi-asset solutions? These and many other questions are asked, and suggestions provided as potential solutions. Having worked together for fifteen years, the authors’ present implementable solutions which have helped them successfully manage large asset pools. The Academic Perspective “Multi-Asset Investing asks fundamental questions about the asset allocation investment processes in use today, and can have a substantial impact on the future structure of the finance industry. It clarifies and distils the techniques that investment professionals need to master to add value to client portfolios.” —Paul Smith, President & CEO, CFA Institute “Pranay Gupta, Sven Skallsjo, and Bing Li describe the essential concepts and applications of multi-asset investing. Their treatment is far ranging and exceptionally lucid, and always with a nod to practical application. Buy this book and keep it close at hand.” —Mark Kritzman, MIT Sloane School of Management “Innovative solutions to some of the most difficult investment problems we are faced with today. Multi-asset Investing tackles investment issues which don’t have straight forward solutions, but nevertheless are faced by every investment professional. This book sets the standard for investment processes of all asset managers.” —SP Kothari, MIT Sloane School of Management The Asset Owner Perspective “Multi-asset means different things to different people. This is the first text that details a comprehensive framework for managing any kind of multi-asset investment problem. Further, its explanation of the commercial aspects of managing a multi-asset investment business for an asset manager, private bank or asset owner make it an indispensable tool” —Sadayuki Horie, Dy. Chairman - Investment Advisory Comm., Government Pension Investment Fund, Japan “Multi-Asset Investing shows the substantial scope there is to innovate the asset allocation process. With its novel approaches to allocation, portfolio construction and risk management it demonstrates the substantial value that can be added to any portfolio. The solutions proposed by Multi-Asset Investing are creative, thought provoking, and may well be the way all portfolios need to be managed in the future.” —Mario Therrien, Senior Vice President, Caisse de Depot et Placement du Quebec, Canada The Asset Manager’s Perspective “Never has astute asset allocation and diversification been more crucial than today. Asset Managers which are able to innovate their investment processes and products in this area, are more likely to be the winners. Multi-Asset Investing provides both simple and sophisticated, tested and implementable techniques for successfully managing multi-asset portfolios.” —Vincent Camerlynck, former CEO BNP Paribas Investment Partners, Asia Pacific The Investment Strategist Perspective “For plan sponsors, portfolio managers, analysts and risk managers, Multi-Asset Investing is an unparalleled guide for portfolio management. Its approach to blending the quantitative and fundamental, top-down and bottom up and the risk and return frameworks makes it a valuable tool for any kind of investment professional. It clarifies a complex subject into a series of practical ideas to help add value to any portfolio.” —Ajay S. Kapur, Chief Strategist, BOA Merrill Lynch Asia
| Author | : Sebastien Page |
| Publisher | : McGraw Hill Professional |
| Total Pages | : 256 |
| Release | : 2020-11-10 |
| Genre | : Business & Economics |
| ISBN | : 1260474887 |
Generate solid, long-term profits with a portfolio allocated for your investing needs Asset allocation is the key to investing performance. Unfortunately, no single approach works perfectly—developing the right balance requires a clear-eyed look at the many models available to you, various investing methodologies, and your or your client’s level of risk tolerance. And that’s where this important guide comes in. Written by a leading allocation expert from T. Rowe Price, Beyond Diversification provides the knowledge, insights, and approaches you need to make the best allocation decisions for your goals. This deep dive into the how’s and why’s of asset allocation is organized by the three decisive components of a successfully allocated portfolio: Return Forecasting discusses the desired return investors seek. Risk Forecasting covers the level of risk investors are prepared to assume to achieve that return. Portfolio Construction calibrates the stock-bond mix that balances the risks and returns. With examples from T. Rowe Price’s asset allocation team showing you how the process works in the real world, Beyond Diversification provides everything you need to find the asset combination that will deliver the results you seek. You’ll learn how to choose the right tradeoffs, build the most effective asset allocation combination for your needs, and dramatically increase your odds of success for the long run.
| Author | : Theodore Michael Johnson |
| Publisher | : |
| Total Pages | : 148 |
| Release | : 1989 |
| Genre | : Business enterprises |
| ISBN | : |
| Author | : David Blanchett |
| Publisher | : |
| Total Pages | : 26 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
There is surprisingly little agreement among academics about the existence of time diversification, which we define as the anomaly where equities become less risky over longer investment periods. This study provides the most thorough analysis of time diversification conducted, using 113 years of historical data from 20 countries (over 2,000 years of total return data). We construct optimal portfolios for 20 different countries based on varying levels of investor risk aversion and time horizons using both overlapping and distinct historical time periods. We find strong historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons, and that the time diversification effect is relatively consistent across countries and that it persists for different levels of risk aversion. We also note that the time diversification effect increased throughout the 20th century despite evidence of a declining risk premium. Although time diversification has been criticized as inconsistent with market efficiency, our empirical results suggest that the superior performance of equities over longer time horizons exists across global equity markets and time periods.
