Book

Strategic Asset Allocation

John Y. Campbell and Luis M. Viceira

Published in print January 2002 | ISBN: 9780198296942
Published online November 2003 | e-ISBN: 9780191596049 | DOI: https://dx.doi.org/10.1093/0198296940.001.0001

Series: Clarendon Lectures in Economics

Strategic Asset Allocation

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One of the most important decisions many people face is the choice of a portfolio of assets for retirement savings. The leading academic paradigm of portfolio choice, the mean‐variance analysis of Markowitz, does not give adequate guidance for this long‐term investment problem because it assumes that investors care only about the mean and variance of return over a single short period. The book develops an alternative paradigm, the inter‐temporal model of Merton, into an empirically usable framework with the following implications. The safe asset for a long‐term investor is not a Treasury bill, but a long‐term inflation‐indexed bond that provides a stable stream of real income. A nominal bond is a good substitute for an inflation‐indexed bond only if inflation risk is low. There is evidence that stock returns are mean‐reverting, with bull markets tending to follow bear markets and vice versa; this suggests that long‐term investors should increase their average stockholdings but should also vary their stockholdings with the overall level of the stock market. Investors with a stable stream of labour income can afford a greater exposure to stock market risk.

Keywords: asset allocation; bonds; financial planning; income; investment horizon; mean‐variance analysis; Robert C. Merton; portfolio choice; retirement; savings

Book.  272 pages.  Illustrated.

Subjects: Financial Markets

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Table of Contents

Introduction in Strategic Asset Allocation

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Myopic Portfolio Choice in Strategic Asset Allocation

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Who Should Buy Long‐Term Bonds? in Strategic Asset Allocation

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Human Wealth and Financial Wealth in Strategic Asset Allocation

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Investing Over the Life Cycle in Strategic Asset Allocation

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