Allocation Betas

Abstract

The complexities of standard optimization can obscure the intuitive decision process that should play a major role in asset allocation. The use of allocation alphas and betas - with U.S. equity as the beta source - facilitates an intuitive approach and greatly simplifies the decision process. A portfolio's assets are separated into two groups: Swing assets are the traditional liquid asset classes, such as U.S. bonds and equity; the alpha core is all other assets, which are subject to more stringent limits. After the nontraditional assets are combined to form an alpha core, the result is a three-part efficient frontier: (1) a cash-to-core segment, (2) a fixed-core segment, and (3) an equity extension. The boundaries lead to a sweet spot on the efficient frontier where most U.S. institutional portfolios are clustered.

Keywords: Portfolio Management, Asset Allocation