A Framework for Examining Asset Allocation Alpha

Journal of Index Investing, vol. 3, no. 4 (Spring 2013), pp. 64-72

Posted: 11 Jan 2013 Last revised: 28 Dec 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Omid Shakernia

Research Affiliates, LLC

Date Written: December 20, 2012

Abstract

Despite the large body of literature on the importance of asset allocation as a primary determinant of portfolio performance, the definition of asset allocation “alpha” remains a poorly defined concept. In this article, we show that a portfolio’s total alpha can be decomposed into alpha from asset allocation and manager selection. The asset allocation alpha can then be further attributed to value-add from:

1) taking additional risk exposure relative to the policy portfolio,

2) exploiting the relative value differential between assets with similar risk exposures, and

3) timing the cyclicality in risk premia.

Keywords: asset allocation, alpha, portfolio performance

JEL Classification: G10, G11

Suggested Citation

Hsu, Jason C. and Shakernia, Omid, A Framework for Examining Asset Allocation Alpha (December 20, 2012). Journal of Index Investing, vol. 3, no. 4 (Spring 2013), pp. 64-72. Available at SSRN: https://ssrn.com/abstract=2199099

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Omid Shakernia

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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