Is Naïve Asset Allocation Always Preferable?
50 Pages Posted: 28 Apr 2023
Date Written: April 17, 2023
Abstract
Challenges to the empirical implementation of portfolio optimization abound, leading to a recent focus upon the naïve equally weighted portfolio as asset allocation benchmark. In this paper, we extend the performance analysis of the naïve allocation approach to encompass data both within and across asset classes (equity, bonds, commodities and real-estate). Our assessment combines tail-risk measures with more typical risk-adjusted returns after accounting for transaction costs. When allocating across asset classes, we provide strong evidence that minimum-variance portfolios provide better risk-adjusted returns and reduced tail risk. In contrast, when allocating within asset classes, only limited support for outperformance is found. We attribute these findings to the level of systematic risk in the asset universe, which is consistently high when allocating within asset classes and varies greatly across asset classes.
Keywords: Asset Allocation, Bond Market, Commodity Markets, Naïve Allocation, Optimization, Real Estate Market, Tail Risk
JEL Classification: G1, G11
Suggested Citation: Suggested Citation