An Asset Allocation Puzzle

36 Pages Posted: 12 Jul 2000 Last revised: 21 Apr 2008

See all articles by Niko Canner

Niko Canner

Harvard University - Department of Economics

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

David N. Weil

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1994

Abstract

This paper examines popular advice on portfolio allocation among cash, bonds, and stocks. It documents that this advice is inconsistent with the mutual-fund separation theorem, which states that all investors should hold the same composition of risky assets. In contrast to the theorem, popular advisors recommend that aggressive investors hold a lower ratio of bonds to stocks than conservative investors. The paper explores various possible explanations of this puzzle. It concludes that the portfolio recommendations can be explained if popular advisors base their advice on the unconditional distribution of nominal returns. It also finds that the cost of this money illusion is small, as measured by the distance of the recommended portfolios from the mean-variance efficient frontier.

Suggested Citation

Canner, Niko and Mankiw, N. Gregory and Weil, David Nathan, An Asset Allocation Puzzle (September 1994). NBER Working Paper No. w4857. Available at SSRN: https://ssrn.com/abstract=226527

Niko Canner

Harvard University - Department of Economics

Littauer Center
Cambridge, MA 02138
United States

N. Gregory Mankiw (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 223
Cambridge, MA 02138
United States
617-495-4301 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Nathan Weil

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
401-863-1754 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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