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Strategic asset allocation and the role of alternative investments

Research output: Contribution to journalJournal article

Published

Journal publication date06/2014
JournalEuropean Financial Management
Journal number3
Volume20
Number of pages27
Pages521-547
Early online date19/03/12
Original languageEnglish

Abstract

We introduce a framework for strategic asset allocation with alternative investments. Our framework uses a quantifiable risk preference parameter, λ, instead of a utility function. We account for higher moments of the return distributions and approximate best-fit distributions. Thus, we replace the empirical return distributions with two normal distributions. We then use these in the strategic asset allocation. Our framework yields better results than Markowitz's framework. Furthermore, our framework better manages regime switches that occur during crises. To test the robustness of our results, we use a battery of robustness checks and find stable results.