Building and maintaining investment portfolios

2021 ◽  
pp. 315-324
Author(s):  
Jesper Rangvid
Keyword(s):  
Asset Allocation ◽  
Portfolio Diversification ◽  
Economic Environment ◽  
Allocation Decision ◽  
Practical Advice ◽  
Investment Portfolios

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.

scholarly journals Financial Advice and Portfolio Diversification

2019 ◽  
Vol 8 (4) ◽  
pp. 178
Author(s):  
Augustine C. Arize ◽  
Tao Guo ◽  
John Malindretos ◽  
Lawrence Verzani
Keyword(s):  
Financial Institution ◽  
Portfolio Diversification ◽  
Insurance Companies ◽  
Financial Advice ◽  
Portfolio Decisions ◽  
Investment Portfolios ◽  
Diversified Portfolio

This paper examines whether households diversify their investment portfolios and whether portfolio diversification could be affected by where investors seek advice. We found that respondents find advice from banks, insurance companies, and brokerage houses less helpful compared to reading investment research and financial periodicals when making their portfolio decisions. Comparing among the advice from all type of financial institution or financial professionals, it is found that advice from brokerage houses is still the most helpful. But when looking at their actual portfolio diversification, those who rely on brokers’ advice ended up with a less diversified portfolio. These findings support our hypothesis that investors’ portfolio could be negatively influenced because of the services they received from brokerage houses. 

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

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.

Costs and liabilities of US public pension systems in a low-return environment

2020 ◽  
pp. 1-18
Author(s):  
Gang Chen ◽  
David Matkin ◽  
Hyewon Kang
Keyword(s):  
Asset Allocation ◽  
Simulation Method ◽  
Public Pension ◽  
Moderating Effects ◽  
Pension Systems ◽  
Long Term Effect ◽  
Unfunded Liabilities ◽  
Investment Returns ◽  
Investment Portfolios

Abstract In recent years, a growing number of capital market professionals have projected a low-return environment in US investment portfolios – where returns in most asset classes are expected to drop below historical rates. While these specific forecasts may not fully materialize, it is natural for cyclical investment markets to go through extended periods of lower returns, creating significant risks for public pension systems which rely on investment returns to sustain their long-term solvency and offset budgetary contributions. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies.

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

2014 ◽  
Vol 32 (3) ◽  
pp. 282-305 ◽  
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.

How do institutional pension managers consider real estate

2017 ◽  
Vol 35 (1) ◽  
pp. 26-43 ◽  
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.

The Impact of Skewness and Fat Tails on the Asset Allocation Decision

2011 ◽  
Vol 67 (2) ◽  
pp. 23-35 ◽  
Author(s):  
James X. Xiong ◽  
Thomas M. Idzorek
Keyword(s):  
Asset Allocation ◽  
Fat Tails ◽  
Allocation Decision ◽  
The Impact

The Cost of Sharia Investing: Comparative Empirical Study in Indonesian Stock Market

2016 ◽  
Vol 4 (1) ◽  
pp. 33 ◽  
Author(s):  
Muhammad Rifqi
Keyword(s):  
Stock Market ◽  
Asset Allocation ◽  
Value At Risk ◽  
Historical Data ◽  
Composite Index ◽  
Portfolio Diversification ◽  
Substantial Cost ◽  
Risk Characteristics ◽  
Simulation Results ◽  
The Cost

This study attempts to investigate the financial performance of Jakarta Islamic Index (JII) in comparison with more widely known Jakarta Composite Index (JCI). Using historical data from January 2004 to May 2015, we comprehensively measure returns and risk properties of the indices using mean returns, standard deviation, Sharpe ratio, Treynor ratio, Jensen Alpha, and Value-at-Risk, and evaluate their results. We also perform portfolio simulation to assess the diversification capability of JII from strategic asset allocation perspective. Our findings indicate that despite JII outperforms JCI during pre-crisis in terms of raw and risk-adjusted returns, it underperforms JCI in all other sub-periods. Meanwhile, in terms of risk characteristics, we find that JII is a clear inferior to JCI. Thus, in overall we argue that there is a substantial cost associated with Sharia investing in Indonesian Stock Market. Nevertheless, simulation results indicate that JII could serve as a valuable portfolio diversification tool, in which it succeeds in lowering the risk of the whole portfolio.   

Economic recovery and inflation risk: what is the “price” to manage debt?

2021 ◽  
Vol 16 (2) ◽  
pp. 21-34
Author(s):  
Gianluca Macchia ◽  
Keyword(s):  
Portfolio Management ◽  
Asset Allocation ◽  
Ad Hoc ◽  
Government Debt ◽  
Economic Recovery ◽  
Stress Tests ◽  
Policy Makers ◽  
Public Investments ◽  
Investment Portfolios ◽  
The Impact

It is clear the action of policy makers aimed at supporting the economic recovery, holding up consumption in the short term as well as public investments in the long terms. Furthermore, policy makers exploit a favorable monetary policy as long as inflation allows it. This effect can be surely considered a current and future issue that impacts on the levels of government debt, the sustainability and the new Fed overshooting strategy for inflation (AIT) which makes flexible the optimal 2% target. In terms of portfolio management, these effects are very negative considering both the exposure to government debt and the impact on the credit and equity assets. High levels of inflation are certainly useful in order to manage the debt in real terms, but it could turn to be a risk for portfolio management. This study aims to show how these risks linked with inflation can impact on the value of the different types of investment portfolios characterized by different levels of volatility, different asset classes and equity/corporate factor exposures. Through the application of a composite scenario on several variables, ad-hoc stress tests and scenarios, the article shows the key-role of an ex-ante risk management participation for a proper asset-allocation.

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