Types of Asset Allocations

Besides Strategic Asset Allocation and Tactical Asset Allocation, there are also:

1. Dynamic asset allocations
2. Static asset allocations

Dynamic asset allocations recognize different time horizons of an investor. Performance in one period is affected by the previous period. Static asset allocations only use one mean-variance input and compute the long term allocations. Dynamic asset allocations is more accurate but also more expensive.

There are also 2 different management approaches:

1. Asset only Management
2. Asset/Liability Management (ALM)

For ALM, the liability of an investor is explicitly included in the model. In Asset-only management approach, liability is implicitly embedded in the require rate of return.

Roy’s Safety-First Measure:

(R – R_MAR)/sigma

R_MAR is the minimum acceptable return

Good Asset Class Specification:

1. Assets in one class have similar descriptive and statistical characteristics
2. Assets cannot be classified in different classes at the same time (otherwise bad classification)
3. Should have minimal correlation among different classes (for diversification)
4. Contain most of the investable assets (to shift up efficient frontier)
5. Contain mostly liquid assets (for rebalancing)