Prudent Public Sector Investing and Modern Portfolio Theory: An Examination of Public Sector Defined Benefit Pension Plans

19 Pages Posted: 3 Jan 2011

See all articles by Odd J. Stalebrink

Odd J. Stalebrink

affiliation not provided to SSRN

Kenneth A. Kriz

University of Nebraska at Omaha - School of Public Administration

Weiyu Guo

University of Nebraska at Omaha - Department of Finance, Banking & Law

Abstract

This research examines the extent to which public pension programs allocate assets in a manner that is consistent with an optimal portfolio, as defined by Modern Portfolio Theory (MPT). The examination is pursued by way of a statistical analysis, using a portfolio optimization model and data on some of the nation's largest public DB plans. The analysis illustrates that the majority of the plans in the sample are incurring far more risk in their portfolios than is optimal given their target rates of return and that this risk level is a result of nonprudent allocation across asset classes. The findings suggest that there might be opportunities to improve the long-term performance of defined benefit plans by adjusting asset allocation targets and legal lists in a manner that is more consistent with MPT.

Suggested Citation

Stalebrink, Odd J. and Kriz, Kenneth A. and Guo, Weiyu, Prudent Public Sector Investing and Modern Portfolio Theory: An Examination of Public Sector Defined Benefit Pension Plans. Public Budgeting & Finance, Vol. 30, No. 4, pp. 28-46, 2010. Available at SSRN: https://ssrn.com/abstract=1733766 or http://dx.doi.org/10.1111/j.1540-5850.2010.00967.x

Odd J. Stalebrink

affiliation not provided to SSRN

Kenneth A. Kriz (Contact Author)

University of Nebraska at Omaha - School of Public Administration ( email )

Annex 27
6001 Dodge Street
Omaha, NE
United States
402-554-2058 (Phone)
402-554-2682 (Fax)

Weiyu Guo

University of Nebraska at Omaha - Department of Finance, Banking & Law ( email )

60th and Dodge Streets
Omaha, NE 68182-0048
United States

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