Abstract

http://ssrn.com/abstract=1921612
 


 



Long-Run Investment Horizons and Implications for Mixed-Asset Portfolio Allocations


Joseph L. Pagliari


University of Chicago - Booth School of Business

September 1, 2011


Abstract:     
When different asset classes display varying degrees of serial correlation, the investment horizon may substantially alter optimized mixed-asset portfolio allocations. Private-market assets (such as commercial real estate and private equity) often display much higher levels of autocorrelation than their public-market counterparts. Consequently, the one-year returns typically used in mixed-asset portfolio optimization procedures often generate excessive allocations to private-market asset classes. To counteract these excessive loadings, many researchers and practitioners advocate either ad hoc rules designed to constrain the maximum allocation to private-market vehicles and/or the use of some de-smoothing procedure to inject additional volatility in the observed return series. This paper takes a different approach by examining the three components in the standard portfolio optimization technique as the investment horizon lengthens; the auto-correlated nature of the observed returns of private-market assets implies that (annualized) long-horizon volatility decays less slowly – as compared to those public-market asset classes exhibiting the random walk – and long-horizon correlation (with most public-market alternatives) increases. In re-running the mixed-asset portfolio optimization with long-horizon returns, the allocations to commercial real estate – as one example of private-market assets – are much reduced and more consistent with allocation levels generally found in large institutional pension plans.

Number of Pages in PDF File: 61

working papers series


Download This Paper

Date posted: September 4, 2011  

Suggested Citation

Pagliari, Joseph L., Long-Run Investment Horizons and Implications for Mixed-Asset Portfolio Allocations (September 1, 2011). Available at SSRN: http://ssrn.com/abstract=1921612 or http://dx.doi.org/10.2139/ssrn.1921612

Contact Information

Joseph L. Pagliari (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Feedback to SSRN


Paper statistics
Abstract Views: 516
Downloads: 142
Download Rank: 116,282

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.343 seconds