Portfolio Performance and Strategic Asset Allocation Across Different Economic Conditions

37 Pages Posted: 15 Mar 2006

See all articles by Jarjisu Sa-Aadu

Jarjisu Sa-Aadu

University of Iowa - Department of Finance

James D. Shilling

DePaul University; National Bureau of Economic Research (NBER)

Ashish Tiwari

University of Iowa

Date Written: March 12, 2006

Abstract

Motivated by the theoretical results on strategic asset allocation, we examine the gains in portfolio performance when investors diversify into different asset classes, with particular focus on the timeliness of such gains. Although the various asset classes we analyze yield significant gains in portfolio performance, even in the presence of short sales constraints, the timeliness of the gains differs considerably across the asset classes. Our key result is that commodities and precious metals, and equity REITs are the two asset classes that deliver portfolio gains when consumption growth is low and/or volatile, i.e., when investors really care for such benefits. Consistent with these results, our examination of investor portfolio allocations using a regime switching framework reveals that during the 'bad' economic state, the mean-variance optimal risky portfolio is tilted towards equity REITs, precious metals, and Treasury bonds. Our analysis highlights an important metric by which to judge the attractiveness of an asset class in a portfolio context, namely the timeliness of the gains in portfolio performance.

Keywords: Portfolio diversification, volatility bounds, mean-variance spanning, regime switching

JEL Classification: G11, G12

Suggested Citation

Sa-Aadu, Jarjisu and Shilling, James D. and Tiwari, Ashish, Portfolio Performance and Strategic Asset Allocation Across Different Economic Conditions (March 12, 2006). Available at SSRN: https://ssrn.com/abstract=890816 or http://dx.doi.org/10.2139/ssrn.890816

Jarjisu Sa-Aadu

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States
319-335-0929 (Phone)
319-335-3690 (Fax)

James D. Shilling

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ashish Tiwari (Contact Author)

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari

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