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Strategic Asset Allocation - The Impact of Foreign Exposure on Portfolio Choice

Robertsson, Philip LU (2016) NEKN05 20161
Department of Economics
Abstract
Plenty of research has been made on strategic asset allocation, but the focus on foreign market exposure is sparse. This paper analyzes how the investor’s portfolio choice is affected when exposed to four foreign assets, one domestic asset, and the risk free interest rate. Two models are developed using dynamic programming for an investor with iso-elastic utility and lognormal asset returns. The problem is derived under the assumption of constant investment opportunities, making the analysis more mathematically convenient. In addition, the investor’s certainty equivalent of wealth is derived and assessed throughout the investment horizon and as diversification possibilities increases with the models. The optimal portfolio choice problem is... (More)
Plenty of research has been made on strategic asset allocation, but the focus on foreign market exposure is sparse. This paper analyzes how the investor’s portfolio choice is affected when exposed to four foreign assets, one domestic asset, and the risk free interest rate. Two models are developed using dynamic programming for an investor with iso-elastic utility and lognormal asset returns. The problem is derived under the assumption of constant investment opportunities, making the analysis more mathematically convenient. In addition, the investor’s certainty equivalent of wealth is derived and assessed throughout the investment horizon and as diversification possibilities increases with the models. The optimal portfolio choice problem is solved using empirical data between 1996 and 2016. Attained values of the portfolio weights show quite extreme numbers, as many other mean-variance models do. The result provides no clear conclusion regarding the investor´s portfolio choice of risky assets. However, the investor’s certainty equivalent of wealth turned out to be exponentially increasing over time but did not change with diversification possibilities. (Less)
Popular Abstract
Plenty of research has been made on strategic asset allocation, but the focus on foreign market exposure is sparse. This paper analyzes how the investor’s portfolio choice is affected when exposed to four foreign assets, one domestic asset, and the risk free interest rate. Two models are developed using dynamic programming for an investor with iso-elastic utility and lognormal asset returns. The problem is derived under the assumption of constant investment opportunities, making the analysis more mathematically convenient. In addition, the investor’s certainty equivalent of wealth is derived and assessed throughout the investment horizon and as diversification possibilities increases with the models. The optimal portfolio choice problem is... (More)
Plenty of research has been made on strategic asset allocation, but the focus on foreign market exposure is sparse. This paper analyzes how the investor’s portfolio choice is affected when exposed to four foreign assets, one domestic asset, and the risk free interest rate. Two models are developed using dynamic programming for an investor with iso-elastic utility and lognormal asset returns. The problem is derived under the assumption of constant investment opportunities, making the analysis more mathematically convenient. In addition, the investor’s certainty equivalent of wealth is derived and assessed throughout the investment horizon and as diversification possibilities increases with the models. The optimal portfolio choice problem is solved using empirical data between 1996 and 2016. Attained values of the portfolio weights show quite extreme numbers, as many other mean-variance models do. The result provides no clear conclusion regarding the investor´s portfolio choice of risky assets. However, the investor’s certainty equivalent of wealth turned out to be exponentially increasing over time but did not change with diversification possibilities. (Less)
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author
Robertsson, Philip LU
supervisor
organization
course
NEKN05 20161
year
type
H1 - Master's Degree (One Year)
subject
keywords
Strategic asset allocation, Dynamic programming, Foreign exposure, Portfolio choice, Certainty equivalent of wealth
language
English
id
8876071
date added to LUP
2016-06-22 13:16:43
date last changed
2016-06-22 13:16:43
@misc{8876071,
  abstract     = {Plenty of research has been made on strategic asset allocation, but the focus on foreign market exposure is sparse. This paper analyzes how the investor’s portfolio choice is affected when exposed to four foreign assets, one domestic asset, and the risk free interest rate. Two models are developed using dynamic programming for an investor with iso-elastic utility and lognormal asset returns. The problem is derived under the assumption of constant investment opportunities, making the analysis more mathematically convenient. In addition, the investor’s certainty equivalent of wealth is derived and assessed throughout the investment horizon and as diversification possibilities increases with the models. The optimal portfolio choice problem is solved using empirical data between 1996 and 2016. Attained values of the portfolio weights show quite extreme numbers, as many other mean-variance models do. The result provides no clear conclusion regarding the investor´s portfolio choice of risky assets. However, the investor’s certainty equivalent of wealth turned out to be exponentially increasing over time but did not change with diversification possibilities.},
  author       = {Robertsson, Philip},
  keyword      = {Strategic asset allocation,Dynamic programming,Foreign exposure,Portfolio choice,Certainty equivalent of wealth},
  language     = {eng},
  note         = {Student Paper},
  title        = {Strategic Asset Allocation - The Impact of Foreign Exposure on Portfolio Choice},
  year         = {2016},
}