How should private investors diversify? : An empirical evaluation of alternative asset allocation policies to construct a "world market portfolio"

Jacobs, Heiko ; Müller, Sebastian ; Weber, Martin

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URN: urn:nbn:de:bsz:180-madoc-24930
Document Type: Working paper
Year of publication: 2009
The title of a journal, publication series: None
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Subject headings (SWD): Portfoliomanagement , Portfolio Selection , Fondsmanager , Heuristik
Keywords (English): portfolio theory , asset allocation , investment management , international diversification , heuristics , fundamental indexing
Abstract: This study evaluates the out-of-sample performance of numerous asset allocation strategies from the perspective of a Euro zone investor. Besides an increased sample period from January 1973 to December 2008, our contribution to the literature is twofold. First, we compare the performance of a broad spectrum of heuristic portfolio policies with a large set of well-established model extensions of the Markowitz (1952) mean-variance framework. Second, we explicitly differentiate between two prominent ways of diversification that are usually analyzed separately: international diversification in the stock market and diversification over different asset classes. Our analysis allows us to compare and discuss different diversification strategies to construct a "world market portfolio" that is as ex-ante efficient as possible. For international equity diversification, we find that none of the Markowitz-based portfolio models is able to significantly outperform simple heuristics. Among those, the GDP weighting dominates the traditional cap-weighted approach. In the asset allocation case, Markowitz models are again not able to beat a broad spectrum of fixed-weight alternatives out-of-sample. Analyzing more than 5000 heuristics, we find that in fact almost any form of well-balanced allocation over asset classes offers similar diversification gains as even very sophisticated and recently developed portfolio optimization approaches. Based on our findings, we suggest a simple and cost-efficient allocation approach for private investors.
Additional information: Available at SSRN:

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