Strategic Asset Allocation
Portfolio Choice for Long-Term Investors
Published on 3. January 2002
Book
Hardback
272 pages
978-0-19-829694-2 (ISBN)
Description
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists.
Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors---both individuals and institutions such as charitable foundations or universities---seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption.
At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities---both interest rates and risk premia on bonds and stocks---vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models.
This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors---both individuals and institutions such as charitable foundations or universities---seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption.
At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities---both interest rates and risk premia on bonds and stocks---vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models.
This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Reviews / Votes
Finance academics will find a lot to interest them in this book. * Times Higher Education Supplement * Strategic Asset Allocation represents the state of the art of normative asset allocation studies. For that reason alone, pensions researchers and practitioners would do well to read it and take its lessons to heart. * Journal of Pension Economics and Finance * This book has the potential to change fundamentally the way researchers and practitioners think about the investment and portfolio aspects of pensions. It is clearly written, concise, and explains the implications of mathematical results with care and rigor ... essential reading for anyone who works with pension funds in a research or practical capacity ... crucial reading for those who wish to understand, and improve upon, the investment advice offered to members of defined contribution pension plans. * Journal of Pension Economics and Finance * Uses some sophisticated mathematics such as partial differential equations and stochastic calculus but the exposition is nonetheless clear and a reader does not have to be at a very high technical level to appreciate the main ideas. * Investment & Pensions Europe * The material covered is technically demanding, but Campbell and Viceira do an excellent job of presenting it in a way that maximises accessibility. Those in investment consulting, private client management and brokerage services should be interested in this book. * Professional Investor * Campbell and Viceira do an excellent job of interspersing the mathematical findings with lucid summaries of what they mean for portfolio planning and how they interrelate. * Professional Investor * Provides a useful build-up to the logical requirements of the long-term investor. * Financial Adviser * Useful as an academic reference. * Actuary * In Strategic Asset Allocation John Campbell and Luis Viceira go beyond the usual capital-markets research monographs that survey a broad swath of asset pricing and investment theory. Instead, they dig deeply and insightfully into how an individual investor would best allocate wealth into broad asset classes over a lifetime, bearing in mind age, risk preferences, changing market conditions, and uninsurable income shocks. With this clearly written synthesis of the best recent research on the topic, much of it their own, Campbell and Viceira have achieved excellence! * Darrell Duffie, Graduate School of Business, Stanford University *More details
Series
Language
English
Place of publication
Oxford
United Kingdom
Target group
Professional and scholarly
Illustrations
16 figures
Dimensions
Height: 222 mm
Width: 145 mm
Thickness: 18 mm
Weight
477 gr
ISBN-13
978-0-19-829694-2 (9780198296942)
Copyright in bibliographic data and cover images is held by Nielsen Book Services Limited or by the publishers or by their respective licensors: all rights reserved.
Schweitzer Classification
Other editions
Additional editions
John Y. Campbell | Luis M. Viceira
Strategic Asset Allocation
Portfolio Choice for Long-Term Investors
E-Book
01/2002
OUP eBook
€72.49
Available for download
Persons
John Y. Campbell received a BA from Oxford in 1979 and a PhD from Yale in 1984. He spent the next ten years teaching at Princeton, moving to Harvard in 1994 to become the first Otto Eckstein Professor of Applied Economics. Campbell has co-edited the American Economic Review and the Review of Economics and Statistics; he is a Fellow of the Econometric Society and the American Academy of Arts and Sciences, and a Research Associate and former Director of the Program in Asset Pricing at the National Bureau of Economic Research. His research concerns asset markets, the macroeconomy, and the links between them.
Luis M. Viceira grew up in Santa Fe, Spain, and attended undergraduate college at the Universidad Autonoma in Madrid. In 1993 he came to the United States to attend graduate school, earning a PhD from Harvard in 1998. He has been a member of the Harvard Business School faculty since 1998, where he teaches Finance in the MBA program and in the Doctoral program. He is a Faculty Research Fellow of the National Bureau of Economic Research in Cambridge (MA, USA), a Research Affiliate of the Centre for Economic Policy Research in London (UK), and an associate editor of the Spanish Economic Review. His research concerns investments and asset prices. Viceira is also a member of the Academic Advisory Board of ABP Investments in The Netherlands.
Luis M. Viceira grew up in Santa Fe, Spain, and attended undergraduate college at the Universidad Autonoma in Madrid. In 1993 he came to the United States to attend graduate school, earning a PhD from Harvard in 1998. He has been a member of the Harvard Business School faculty since 1998, where he teaches Finance in the MBA program and in the Doctoral program. He is a Faculty Research Fellow of the National Bureau of Economic Research in Cambridge (MA, USA), a Research Affiliate of the Centre for Economic Policy Research in London (UK), and an associate editor of the Spanish Economic Review. His research concerns investments and asset prices. Viceira is also a member of the Academic Advisory Board of ABP Investments in The Netherlands.
Content
1. Introduction ; 2. Myopic Portfolio Choice ; 3. Who Should Buy Long-Term Bonds? ; 4. Is the Stock Market Safer for Long-Term Investors? ; 5. Strategic Asset Allocation in Continuous Time ; 6. Human Wealth and Financial Wealth ; 7. Investing over the Life Cycle