TY - JOUR T1 - Asset Allocation, Decoupling, and the Opportunity Cost of Cash JF - The Journal of Portfolio Management SP - 25 LP - 35 DO - 10.3905/jpm.2003.319892 VL - 29 IS - 4 AU - Richard B. Harper Y1 - 2003/07/31 UR - https://pm-research.com/content/29/4/25.abstract N2 - Investors often increase their cash and near-cash balances during periods of significant equity volatility. Feeling compelled to salvage what they can in the face of adversity, these investors overlook the opportunity to enhance performance by extending duration in the fixed-income portion of their balanced portfolios. They neglect to keep strategic as well as tactical goals in mind. When equities dominate portfolio volatility, the risk profile of the overall portfolio is relatively insensitive to measured duration extensions. Conversely, the portfolio receives the full return benefit of such an extension. The decoupling of liquid Treasury returns from equity returns during periods of crisis can reinforce the beneficial trade-off of extending duration and slightly reducing equity exposure. An analysis of market data over the past 21 years not only documents the risk-adjusted return benefits of extending duration, but also suggests enhanced downside risk protection. ER -