Long-Run Performance of Dynamic Asset Allocation Strategies

Abstract

Perold and Sharpe (1988) present four dynamic strategies which combine investment in stocks with investment in Treasury bills to reduce the risk of equity portfolios. This study uses empirical resampling (historical simulation) to examine the risk and ending wealth of three of these strategies – buy and hold, constant mix, and CPPI. While results are generally consistent with the average proportion of common stock in the portfolio these strategies imply – greater return and risk from a greater proportion of common stock in the portfolio – there are some exceptions. Finally, although the buy and hold strategy places a positive floor on value of the portfolio while the constant mix strategy does not, this makes the buy and hold strategy less risky than the constant mix strategy only in a few limited cases.