Chapter 16. Asset Allocation and Portfolio Construction

NOËL AMENC, PhD

Professor of Finance, Edhec Graduate School of Business

Director, Edhec Risk and Asset Management Research Centre

FELIX GOLTZ

Senior Research Engineer, Edhec Risk and Asset Management Research Centre

LIONEL MARTELLINI, PhD

Professor of Finance, Edhec Graduate School of Business

Scientific Director, Edhec Risk and Asset Management Research Centre

VÉRONIQUE LE SOURD

Senior Research Engineer, Edhec Risk and Asset Management Research Centre

Abstract: Asset allocation is an essential part of portfolio construction, which allows investors to define the portfolio risk level, and as such determines the portfolio future performance. Asset allocation is to be declined in strategic asset allocation and tactical asset allocation. Strategic asset allocation allows investors to choose their portfolio's long term profile, including regional allocation, sector or asset class choice. This long-term allocation is then periodically readjusted through tactical allocation, in order to take into account short-term opportunities, with the purpose of achieving the best performance for the portfolio, considering the level of risk defined.

Keywords: strategic asset allocation, tactical asset allocation, tactical style allocation, Markowitz model, Black-Litterman model

Portfolio management consists of constructing portfolios and making them evolve in order to reach the return objectives defined by the investor, while respecting the investor's constraints ...

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