Allocation Betas

Posted: 26 Aug 2005

See all articles by Martin L. Leibowitz

Martin L. Leibowitz

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Anthony Bova

Morgan Stanley

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

Suggested Citation

Leibowitz, Martin L. and Bova, Anthony, Allocation Betas. Financial Analysts Journal, Vol. 61, No. 4, pp. 70-82, July/August 2005, Available at SSRN: https://ssrn.com/abstract=776649

Martin L. Leibowitz (Contact Author)

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )

730 Third Avenue
New York, NY 10017-3206
United States

Anthony Bova

Morgan Stanley

1585 Broadway
New York, NY 10036
United States

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