RT Journal Article SR Electronic T1 Advancing Strategic Asset Allocation in a
Multi-Factor World JF The Journal of Portfolio Management FD Institutional Investor Journals SP 59 OP 66 DO 10.3905/jpm.2012.39.1.059 VO 39 IS 1 A1 Farshid M. Asl A1 Erkko Etula YR 2012 UL https://pm-research.com/content/39/1/59.abstract AB Strategic asset allocation is arguably one of the most important, yet least advanced, aspects of investing. The authors present a new approach to strategic asset allocation that leverages the idea that long-term investment returns derive from multiple distinct sources that they call “return-generating factors.” Their approach addresses four key shortcomings of traditional approaches: First, their multi-factor model helps better understand the important sources of return in today’s complex investment universe, generating a substantial increase in estimation precision across asset classes and providing investors with a new way to think about portfolio diversification. Second, their robust portfolio optimization methodology seeks to explicitly account for the uncertainties inherent in the estimates of expected returns, delivering well-diversified portfolios with superior risk?return characteristics. Third, the factor-based risk analytics better capture the true characteristics of asset returns, such as fat tails and increased correlations at times of crises, allowing the authors to more-accurately model the downside risks of portfolios. Finally, the factor-based simulation technique accounts for the impact of different economic conditions (e.g., low interest rates) on future portfolio returns, resulting in more-precise, forward-looking projections.TOPICS: Portfolio theory, tail risks, factor-based models