Asset Allocation: A Recommendation for Resolving the Collision between Theory and Practice

26 Pages Posted: 27 Apr 2016 Last revised: 26 Nov 2017

See all articles by Larry J. Prather

Larry J. Prather

Southeastern Oklahoma State University

James Ross McCown

University of Oklahoma - Division of Finance; Toltec Group

Ron Shaw

Oklahoma City University

Date Written: November 2, 2017

Abstract

We examine the creation of a low-cost optimal risky portfolio that individual investors can easily construct and manage. We consider five index mutual funds and three precious metals that are easy for investors to trade. Collectively, the mutual funds track the returns of the entire U.S. equity market, 98% of foreign stocks, U.S. investment grade bonds, all domestic REITs, and emerging markets. The three precious metals are gold, platinum, and palladium. Because these mutual funds are available in ETF form, we provide optimization results with and without short selling. Optimization results differ greatly from conventional wisdom regarding optimal asset allocation. This actual portfolio may be as close to the theoretical “market portfolio” as is achievable in practice.

Keywords: Asset Allocation, Precious Metals, Optimal portfolios

JEL Classification: G11

Suggested Citation

Prather, Larry J. and McCown, James Ross and Shaw, Ron, Asset Allocation: A Recommendation for Resolving the Collision between Theory and Practice (November 2, 2017). Available at SSRN: https://ssrn.com/abstract=2770897 or http://dx.doi.org/10.2139/ssrn.2770897

Larry J. Prather (Contact Author)

Southeastern Oklahoma State University ( email )

1405 N 4th Ave
Durant, OK 74701
United States

James Ross McCown

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toltec Group ( email )

Oklahoma City, OK
United States

Ron Shaw

Oklahoma City University ( email )

2501 North Blackwelder
Oklahoma City, OK 73106
United States

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