Is Naïve Asset Allocation Always Preferable?

50 Pages Posted: 28 Apr 2023

See all articles by Thomas Conlon

Thomas Conlon

University College Dublin

John Cotter

University College Dublin

Iason Kynigakis

University College Dublin

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting

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

Conlon, Thomas and Cotter, John and Kynigakis, Iason and Salvador, Enrique, Is Naïve Asset Allocation Always Preferable? (April 17, 2023). Available at SSRN: https://ssrn.com/abstract=4420796 or http://dx.doi.org/10.2139/ssrn.4420796

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://https://johncotter.org/

Iason Kynigakis

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

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