Strategic Asset Allocation: Portfolio Choice for Long-Term Investors

Strategic Asset Allocation: Portfolio Choice for Long-Term Investors

Strategic Asset Allocation: Portfolio Choice for Long-Term Investors

Strategic Asset Allocation: Portfolio Choice for Long-Term Investors

Synopsis

'Uses some sophisticated mathematics such as partial differential equations and stochastic calculus but the exposition is nonetheless clear and a reader does not have to be at a very high technical level to appreciate the main ideas.' -Investment andamp; Pensions Europe'The material covered is technically demanding, but Campbell and Viceira do an excellent job of presenting it in a way that maximises accessibility. Those in investment consulting, private client management and brokerage services should be interested in this book.' -Professional Investor'Campbell and Viceira do an excellent job of interspersing the mathematical findings with lucid summaries of what they mean for portfolio planning and how they interrelate.' -Professional Investor'Provides a useful build-up to the logical requirements of the long-term investor.' -Financial Adviser'Useful as an academic reference.' -Actuary'In Strategic Asset Allocation John Campbell and Luis Viceira go beyond the usual capital-markets research monographs that survey a broad swath of asset pricing and investment theory. Instead, they dig deeply and insightfully into how an individual investor would best allocate wealth into broad asset classes over a lifetime, bearing in mind age, risk preferences, changing market conditions, and uninsurable income shocks. With this clearly written synthesis of the best recent research on the topic, much of it their own, Campbell and Viceira have achieved excellence!' -Darrell Duffie, Graduate School of Business, Stanford UniversityThis book links cutting-edge academic analysis of portfolio choice to the practical concerns of institutional investors, financial planners, and individual investors. It shows in empirical detail how long-term portfolios should differ from short-term portfolios. It is the first book-length treatment of one of the most exciting areas of modern finance, and is written by a leading academic who is also actively involved in managing a hedge fund.

Excerpt

This book has its origins in John Campbell's graduate class in asset pricing at Harvard University in 1995-6. The course emphasized a simplified approach to the difficult problem of intertemporal asset pricing, in which nonlinear equations are approximated by loglinear equations that capture much of the economics of the problem. Luis Viceira, the teaching fellow for the course, proposed that a similar approach could be used to study the portfolio choice problems of long-term investors. This became the basis of a chapter in Viceira's 1998 Harvard Ph.D. thesis on labor income risk and portfolio choice, published as Viceira (2001), and of a series of joint papers studying various types of risk to investment opportunities: the risk of a changing equity premium, the risks of changing real interest rates and inflation, and the risk of changing volatility (Campbell and Viceira 1999 ; Chacko and Viceira 1999 ; Campbell, Chan, and Viceira 2001). At the same time, a number of other financial economists realized that portfolio choice theory, long a rather quiet backwater of finance, was again an exciting frontier. Kim and Omberg (1996), Brennan, Schwartz, and Lagnado (1997), Brennan (1998), Balduzzi and Lynch (1999), Brandt (1999), Barberis (2000), and others have developed empirical models of portfolio choice for long-term investors, building on the fundamental insights of Samuelson (1963 , 1969), Mossin (1968), Merton (1969 , 1973), Stiglitz (1970), Rubinstein (1976a , b), and Breeden (1979), that have at last fulfilled the empirical promise of that earlier theoretical literature.

In 1999 , Campbell delivered three Clarendon Lectures at Oxford summarizing a large part of this research. His first lecture covered the material in Chapters 1-3 of this book; his second lecture presented the material in Chapter 4 ; and his last lecture discussed material in Chapters 6 and 7 . This book further expands the scope of the discussion in an attempt to survey the major themes of the portfolio choice literature in the last few years of the twentieth century.

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