Encyclopedia of Financial Models I

Asset Allocation and Portfolio Construction Techniques in Designing the Performance-Seeking Portfolio

NOËL AMENC, PhD

Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute

FELIX GOLTZ, PhD

Head of Applied Research, EDHEC-Risk Institute

LIONEL MARTELLINI, PhD

Professor of Finance, EDHEC Business School, Scientific Director, EDHEC-Risk Institute

PATRICE RETKOWSKY

Senior Research Engineer, EDHEC-Risk Institute

Abstract: Meeting the challenges of modern investment practice involves the design of novel forms of investment solutions, as opposed to investment products customized to meet investors’ expectations. These new forms of investment solutions rely on the use of improved, more efficient performance-seeking portfolio and liability-hedging portfolio building blocks, as well as on the use of improved dynamic allocation strategies. Understanding the conceptual and technical challenges involved in the design of improved benchmarks for the performance-seeking portfolio is critical.

Management is justified as an industry by the capacity of adding value through the design of investment solutions that match investors’ needs. For more than 50 years, the industry has in fact mostly focused on security selection decisions as a single source of added value. This sole focus has somewhat distracted the industry from another key source of added value, namely portfolio construction and asset allocation decisions. In the face of recent crises, and given the intrinsic difficulty ...