At the end of the course, the student should be able to:
– Explain the central role of the asset allocation within the investment process
– Design a consistent and client-specific strategic asset allocation for the long-run using the Mean-variance Analysis framework. See limitations of the approach and avoid frequent pitfalls when collecting and manipulating historical data
– Formulate long-term expectations about returns for major asset classes (cash, equities, bonds, commodities, real-estate) relating asset pricing models to macroeconomic factors
– Identify phases of the business cycle which are commonly supportive to each asset classes
– Exploit the benefit of a geographical, sector or style segmentation, especially when managing a global and diversified portfolio
Empirical surveys periodically highlight the dominance of the asset class allocation as a contributor of performance over the long-run, far ahead of other investment skills such as stock picking or market timing. The course will explore how to develop a robust asset allocation, formulating and justifying recommendations to comply with the client requirementS. Students will practise in manipulating data (market prices & macroeconomic data), using application tools (optimizers, multilinear regression models):
Part 1 – Mean-Variance framework & Historical Returns approach : Recall & application through a practical case study.
Part 2 – Conditional Returns approach : modelling long-term expected returns and risk premiums using macroeconomic factors
Part 3 – Short-term Adjustment of the asset allocation to grab the positive influences of business cycles on each specific asset class
Part 4 – Extension to a global investment portfolio
