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2018 | OriginalPaper | Chapter

3. Strategic Versus Tactical Asset Allocation

Author : Henrik Lumholdt

Published in: Strategic and Tactical Asset Allocation

Publisher: Springer International Publishing

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Abstract

In this chapter, we will evaluate the merits of using the SAA as a stand-alone approach versus combining it with TAA decisions. We will begin with a discussion of the nature of the SAA as an investment decision. This is followed by an examination of the concept of macro-inefficiency and how this relates to asset allocation and a review of some of the empirical research on the importance of asset allocation. We finalize with a discussion of the controversial concept of time diversification, the question of whether a longer time horizon warrants a greater exposure to risk assets, favoring the SAA alone approach.

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previous chapter Performance Evaluation

next chapter Long-Term Return Expectations

See also Samuelson (1998).

Strictly speaking, this requires that returns are independent and identically distributed (i.i.d.) as in a random walk process. In discrete time we can express the holding period return over a given number of years as (1 + HPR) = (1 + R₁)(1 + R₂)…(1 + R_n), where R is the percent return per year and n is the number of years. Converting this to continuous time we use the log form: ln(1 + HPR) = ln (1 + r₁) + ln (1 + r₂) + … + ln (1 + r_n) = r₁ + r₂ + …r_n. If returns are i.i.d., the variance of the total return becomes Var (r₁ + r₂ + … + r_n) = Var(r₁) + Var(r₁) + … + Var(r_n) = NVar(r₁). The standard deviation is then \( {\sigma}_n=\sqrt{Var\ \left({r}_1+{r}_2+\dots +{r}_n\right)}=\sqrt{n}\sqrt{Var\Big({r}_{1\Big)}}={\sigma}_{r1}\sqrt{n}. \) Hence, \( {\sigma}_{r1}=\frac{\sigma_n}{\sqrt{n}} \).

The authors use a statistic called “first-passage time probability”. See further Kritzman and Rich (2002).

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Title: Strategic Versus Tactical Asset Allocation
Author: Henrik Lumholdt
Publisher: Springer International Publishing
Book: Strategic and Tactical Asset Allocation
Print ISBN: 978-3-319-89553-6

Electronic ISBN: 978-3-319-89554-3

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-3-319-89554-3_3