Asset Allocation Decision

This last chapter in the book provides research-based perspectives on a number of challenges investors face when building and maintaining investment portfolios. The paper discusses portfolio diversification, the active vs. passive debate, the asset allocation decision, i.e. what determines the fraction of a portfolio that should be invested in stocks, practical advice on how the economic environment should affect your asset allocation, and other topics.

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Ambiguity aversion and experiential learning: implications for long-term savings decisions

Review of Behavioral Finance ◽

10.1108/rbf-03-2019-0045 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Bryan Foltice ◽

Rachel Rogers

Keyword(s):

Decision Making ◽

Experiential Learning ◽

Asset Allocation ◽

Ambiguity Aversion ◽

Sample Population ◽

Allocation Decision ◽

Content Type ◽

Learning Modules ◽

Return Data

PurposeThis paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.Design/methodology/approachWe evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.FindingsAllowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.Originality/valueWe find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.

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An investigation of property-related decision practice of Australian fund managers

Journal of Property Investment and Finance ◽

10.1108/jpif-02-2014-0014 ◽

2014 ◽

Vol 32 (3) ◽

pp. 282-305 ◽

Cited By ~ 14

Author(s):

Wejendra Reddy ◽

David Higgins ◽

Ron Wakefield

Keyword(s):

Decision Making ◽

Asset Allocation ◽

Continuous Process ◽

Decision Making Process ◽

Allocation Decision ◽

Content Type ◽

Fund Managers ◽

Investment Level ◽

Fund Investment ◽

Managed Funds

Purpose – In Australia, the A$2.2 trillion managed funds industry including the large pension funds (known locally as superannuation funds) are the dominant institutional property investors. While statistical information on the level of Australian managed fund investments in property assets is widely available, comprehensive practical evidence on property asset allocation decision-making process is underdeveloped. The purpose of this research is to identify Australian fund manager's property asset allocation strategies and decision-making frameworks at strategic level. Design/methodology/approach – The research was undertaken in May-August 2011 using an in-depth semi-structured questionnaire administered by mail. The survey was targeted at 130 leading managed funds and asset consultants within Australia. Findings – The evaluation of the 79 survey respondents indicated that Australian fund manager's property allocation decision-making process is an interactive, sequential and continuous process involving multiple decision-makers (internal and external) complete with feedback loops. It involves a combination of quantitative analysis (mainly mean-variance analysis) and qualitative overlay (mainly judgement, or “gut-feeling”, and experience). In addition, the research provided evidence that the property allocation decision-making process varies depending on the size and type of managed fund. Practical implications – This research makes important contributions to both practical and academic fields. Information on strategic property allocation models and variables is not widely available, and there is little guiding theory related to the subject. Therefore, the conceptual frameworks developed from the research will help enhance academic theory and understanding in the area of property allocation decision making. Furthermore, the research provides small fund managers and industry practitioners with a platform from which to improve their own property allocation processes. Originality/value – In contrast to previous property decision-making research in Australia which has mainly focused on strategies at the property fund investment level, this research investigates the institutional property allocation decision-making process from a strategic position involving all major groups in the Australian managed funds industry.

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How do institutional pension managers consider real estate

Journal of Property Investment and Finance ◽

10.1108/jpif-05-2016-0033 ◽

2017 ◽

Vol 35 (1) ◽

pp. 26-43 ◽

Cited By ~ 2

Author(s):

Jon R.G.M. Lekander

Keyword(s):

Real Estate ◽

Asset Allocation ◽

Pension Funds ◽

Real Estate Market ◽

Organizational Capabilities ◽

Future Research ◽

Allocation Decision ◽

Content Type ◽

The Real Estate ◽

Allocation Process

Purpose The asset allocation decision for a pension portfolio needs to consider several, sometimes conflicting, aspects. Most pension managers use models and processes that are developed for the traditional asset classes for analyzing this problem. The purpose of this paper is to investigate how real estate is included in this process, for what purpose and how the real estate portfolio is constructed. Design/methodology/approach Seven individuals responsible for the asset allocation process were interviewed, and their responses were analyzed with regards to organizational options and their real estate strategy. Findings It was found that real estate is held for three different purposes, risk diversification, inflation hedging/liability matching and return enhancement and that the allocation has increased over time. The allocation strategy has evolved at least in part in conjuncture with the organizational structure set in place to overcome real estate market frictions. Research limitations/implications The interviews were geographically limited to pension funds domiciled in Sweden and Finland. Practical implications It is concluded that the organizational capabilities of the pension fund of handling real estate is an important consideration for the ensuing real estate portfolio. Originality/value The originality of this paper lies in that it is based on interviews with individuals who are responsible for the asset allocation decision at large pension funds. The findings of the paper identify areas of interest for future research.

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