Should a Skeptical Portfolio Insurer Use an Optimal or a Risk-Based Allocation?

23 Pages Posted: 3 Jun 2014 Last revised: 30 Apr 2015

See all articles by Maxime Bonelli

Maxime Bonelli

HEC Paris - Finance Department

Daniel Mantilla-Garcia

Universidad de Los Andes - School of Management; EDHEC Risk Institute

Date Written: December 15, 2014

Abstract

Following recent evidence of out-of-sample stock market return predictability, the authors aim to evaluate whether the potential benefits suggested by asset allocation theory can actually be captured in the real world using expected return estimates from a predictive system. The question is addressed in the context of an investor maximizing the long-term growth rate of wealth under a maximum drawdown constraint, and compare the optimal strategy using the predictive system with a similar risk-based allocation strategy independent of expected return estimates. The authors find that the risk-based strategy implies nonetheless very variable and relatively high expected returns, and report important potential benefits in using the expected return estimates of the predictive system they used.

Keywords: return predictability, risk-based strategies, asset allocation, portfolio insurance, maximum drawdown

JEL Classification: G110, G170

Suggested Citation

Bonelli, Maxime and Mantilla-Garcia, Daniel, Should a Skeptical Portfolio Insurer Use an Optimal or a Risk-Based Allocation? (December 15, 2014). Available at SSRN: https://ssrn.com/abstract=2444624 or http://dx.doi.org/10.2139/ssrn.2444624

Maxime Bonelli

HEC Paris - Finance Department ( email )

France

Daniel Mantilla-Garcia (Contact Author)

Universidad de Los Andes - School of Management ( email )

Bogota, Bogota D.C.
Colombia

EDHEC Risk Institute ( email )

Lille
France

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