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class="vector-toc-numb">2</span> <span>Asset classes</span> </div> </a> <button aria-controls="toc-Asset_classes-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon mw-ui-icon-wikimedia-expand"></span> <span>Toggle Asset classes subsection</span> </button> <ul id="toc-Asset_classes-sublist" class="vector-toc-list"> <li id="toc-Traditional_assets" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Traditional_assets"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.1</span> <span>Traditional assets</span> </div> </a> <ul id="toc-Traditional_assets-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Alternative_assets" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Alternative_assets"> <div class="vector-toc-text"> <span class="vector-toc-numb">2.2</span> <span>Alternative assets</span> </div> </a> <ul id="toc-Alternative_assets-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-Allocation_strategy" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Allocation_strategy"> <div class="vector-toc-text"> <span class="vector-toc-numb">3</span> <span>Allocation strategy</span> </div> </a> <button aria-controls="toc-Allocation_strategy-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon mw-ui-icon-wikimedia-expand"></span> <span>Toggle Allocation strategy subsection</span> </button> <ul id="toc-Allocation_strategy-sublist" class="vector-toc-list"> <li id="toc-Strategic_asset_allocation" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Strategic_asset_allocation"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.1</span> <span>Strategic asset allocation</span> </div> </a> <ul id="toc-Strategic_asset_allocation-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Dynamic_asset_allocation" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Dynamic_asset_allocation"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.2</span> <span>Dynamic asset allocation</span> </div> </a> <ul id="toc-Dynamic_asset_allocation-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Tactical_asset_allocation" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Tactical_asset_allocation"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.3</span> <span>Tactical asset allocation</span> </div> </a> <ul id="toc-Tactical_asset_allocation-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Core-satellite_asset_allocation" class="vector-toc-list-item vector-toc-level-2"> <a class="vector-toc-link" href="#Core-satellite_asset_allocation"> <div class="vector-toc-text"> <span class="vector-toc-numb">3.4</span> <span>Core-satellite asset allocation</span> </div> </a> <ul id="toc-Core-satellite_asset_allocation-sublist" class="vector-toc-list"> </ul> </li> </ul> </li> <li id="toc-Classification" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Classification"> <div class="vector-toc-text"> <span class="vector-toc-numb">4</span> <span>Classification</span> </div> </a> <ul id="toc-Classification-sublist" class="vector-toc-list"> </ul> </li> <li id="toc-Academic_studies" class="vector-toc-list-item vector-toc-level-1 vector-toc-list-item-expanded"> <a class="vector-toc-link" href="#Academic_studies"> <div class="vector-toc-text"> <span class="vector-toc-numb">5</span> <span>Academic studies</span> </div> </a> <button aria-controls="toc-Academic_studies-sublist" class="cdx-button cdx-button--weight-quiet cdx-button--icon-only vector-toc-toggle"> <span class="vector-icon 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<div class="mw-indicators"> </div> <div id="siteSub" class="noprint">From Wikipedia, the free encyclopedia</div> </div> <div id="contentSub"><div id="mw-content-subtitle"></div></div> <div id="mw-content-text" class="mw-body-content"><div class="mw-content-ltr mw-parser-output" lang="en" dir="ltr"><div class="shortdescription nomobile noexcerpt noprint searchaux" style="display:none">Investment strategy</div> <p class="mw-empty-elt"> </p> <figure class="mw-default-size" typeof="mw:File/Thumb"><a href="/wiki/File:Asset_Allocation.pdf" class="mw-file-description"><img src="//upload.wikimedia.org/wikipedia/commons/thumb/6/68/Asset_Allocation.pdf/page1-290px-Asset_Allocation.pdf.jpg" decoding="async" width="290" height="180" class="mw-file-element" srcset="//upload.wikimedia.org/wikipedia/commons/thumb/6/68/Asset_Allocation.pdf/page1-435px-Asset_Allocation.pdf.jpg 1.5x, //upload.wikimedia.org/wikipedia/commons/thumb/6/68/Asset_Allocation.pdf/page1-580px-Asset_Allocation.pdf.jpg 2x" data-file-width="606" data-file-height="377" /></a><figcaption>Example investment portfolio with a diverse asset allocation</figcaption></figure> <p><b>Asset allocation </b> is the implementation of an <a href="/wiki/Investment_strategy" title="Investment strategy">investment strategy</a> that attempts to balance <a href="/wiki/Financial_risk" title="Financial risk">risk</a> versus reward by adjusting the percentage of each <a href="/wiki/Asset" title="Asset">asset</a> in an investment <a href="/wiki/Portfolio_(finance)" title="Portfolio (finance)">portfolio</a> according to the investor's <a href="/wiki/Risk_tolerance" class="mw-redirect" title="Risk tolerance">risk tolerance</a>, goals and investment time frame.<sup id="cite_ref-investopedia.com_1-0" class="reference"><a href="#cite_note-investopedia.com-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> The focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets. </p> <meta property="mw:PageProp/toc" /> <div class="mw-heading mw-heading2"><h2 id="Description">Description</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=1" title="Edit section: Description"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <style data-mw-deduplicate="TemplateStyles:r1236090951">.mw-parser-output .hatnote{font-style:italic}.mw-parser-output div.hatnote{padding-left:1.6em;margin-bottom:0.5em}.mw-parser-output .hatnote i{font-style:normal}.mw-parser-output .hatnote+link+.hatnote{margin-top:-0.5em}@media print{body.ns-0 .mw-parser-output .hatnote{display:none!important}}</style><div role="note" class="hatnote navigation-not-searchable">Further information: <a href="/wiki/Financial_risk_management#Investment_management" title="Financial risk management">Financial risk management § Investment management</a></div> <p>Many financial experts argue that asset allocation is an important factor in determining returns for an investment portfolio.<sup id="cite_ref-investopedia.com_1-1" class="reference"><a href="#cite_note-investopedia.com-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> Asset allocation is based on the principle that different assets perform differently in different market and <a href="/wiki/Economic" class="mw-redirect" title="Economic">economic</a> conditions. </p><p>A fundamental justification for asset allocation is the notion that different <a href="/wiki/Asset_classes" title="Asset classes">asset classes</a> offer returns that are not perfectly <a href="/wiki/Financial_correlation" title="Financial correlation">correlated</a>, hence <a href="/wiki/Diversification_(finance)" title="Diversification (finance)">diversification</a> reduces the overall <a href="/wiki/Financial_risk" title="Financial risk">risk</a> in terms of the variability of returns for a given level of <a href="/wiki/Expected_return" title="Expected return">expected return</a>. Asset diversification has been described as "the only free lunch you will find in the investment game".<sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup> Academic research has painstakingly explained the importance and benefits of asset allocation and the problems of <a href="/wiki/Active_management" title="Active management">active management</a> (see <a href="#Academic_studies">academic studies</a> section below). </p><p>Although the risk is reduced as long as <a href="/wiki/Financial_correlation" title="Financial correlation">correlations</a> are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and <a href="/wiki/Variance" title="Variance">variance</a>) that existed over some past period. Expectations for return are often derived in the same way. Studies of these forecasting methods constitute an important direction of academic research. </p><p>When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to the asset allocation of <a href="/wiki/Modern_portfolio_theory" title="Modern portfolio theory">modern portfolio theory</a> (MPT), the strategy is, in fact, predicting future risks and returns based on history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from MPT. Other, more subtle weaknesses include seemingly minor errors in forecasting leading to recommended allocations that are grossly skewed from investment mandates and/or impractical—often even violating an investment manager's "common sense" understanding of a tenable portfolio-allocation strategy. </p> <div class="mw-heading mw-heading2"><h2 id="Asset_classes">Asset classes</h2></div> <p>An <a href="/wiki/Asset_classes" title="Asset classes">asset class</a> is a group of economic resources sharing similar characteristics, such as riskiness and return. There are many types of assets that may or may not be included in an asset allocation strategy. </p> <div class="mw-heading mw-heading3"><h3 id="Traditional_assets">Traditional assets</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=2" title="Edit section: Traditional assets"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>The "traditional" asset classes are <i>stocks</i>, <i>bonds</i>, and <i>cash</i>: </p> <ul><li><a href="/wiki/Share_capital" title="Share capital">Stocks</a>: value, dividend, growth, or sector-specific (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; domestic, foreign (developed), emerging or frontier markets</li> <li><a href="/wiki/Bond_(finance)" title="Bond (finance)">Bonds</a> (fixed income securities more generally): investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, <a href="/wiki/Emerging_markets" class="mw-redirect" title="Emerging markets">emerging markets</a></li> <li><a href="/wiki/Cash" title="Cash">Cash</a> and cash equivalents (e.g., <a href="/wiki/Deposit_account" title="Deposit account">deposit account</a>, <a href="/wiki/Money_market_fund" title="Money market fund">money market fund</a>)</li></ul> <p>Allocation among these three provides a starting point. Usually included are hybrid instruments such as <a href="/wiki/Convertible_bond" title="Convertible bond">convertible bonds</a> and preferred stocks, counting as a mixture of bonds and stocks. </p> <div class="mw-heading mw-heading3"><h3 id="Alternative_assets">Alternative assets</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=3" title="Edit section: Alternative assets"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Other alternative assets that may be considered include: </p> <ul><li>Valuable <a href="/wiki/Economic_goods" class="mw-redirect" title="Economic goods">economic goods</a> and <a href="/wiki/Final_good" title="Final good">consumer goods</a> such as precious metals and other valuable tangible goods.</li> <li>Commercial or residential <a href="/wiki/Real_estate" title="Real estate">real estate</a> (also <a href="/wiki/Real_estate_investment_trust" title="Real estate investment trust">REITs</a>)</li> <li>Collectibles such as art, coins, or stamps</li> <li><a href="/wiki/Insurance" title="Insurance">Insurance</a> products (<a href="/wiki/Annuity_(US_financial_products)" class="mw-redirect" title="Annuity (US financial products)">annuity</a>, <a href="/wiki/Life_settlement" title="Life settlement">life settlements</a>, <a href="/wiki/Catastrophe_bond" title="Catastrophe bond">catastrophe bonds</a>, personal <a href="/wiki/Life_insurance" title="Life insurance">life insurance</a> products, etc.)</li> <li><a href="/wiki/Derivative_(finance)" title="Derivative (finance)">Derivatives</a> such as <a href="/wiki/Option_(finance)" title="Option (finance)">options</a>, collateralized debt, and <a href="/wiki/Futures_contract" title="Futures contract">futures</a></li> <li>Foreign <a href="/wiki/Currency" title="Currency">currency</a></li> <li><a href="/wiki/Venture_capital" title="Venture capital">Venture capital</a></li> <li><a href="/wiki/Private_equity" title="Private equity">Private equity</a></li> <li><a href="/wiki/Distressed_securities" title="Distressed securities">Distressed securities</a></li> <li><a href="/wiki/Infrastructure_asset_management" title="Infrastructure asset management">Infrastructure</a></li></ul> <div class="mw-heading mw-heading2"><h2 id="Allocation_strategy">Allocation strategy</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=4" title="Edit section: Allocation strategy"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite. </p> <div class="mw-heading mw-heading3"><h3 id="Strategic_asset_allocation">Strategic asset allocation</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=5" title="Edit section: Strategic asset allocation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>The primary goal of strategic asset allocation is to create an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon.<sup id="cite_ref-idzorek1_3-0" class="reference"><a href="#cite_note-idzorek1-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> Generally speaking, strategic asset allocation strategies are agnostic to economic environments, i.e., they do not change their allocation postures relative to changing market or economic conditions. </p> <div class="mw-heading mw-heading3"><h3 id="Dynamic_asset_allocation">Dynamic asset allocation</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=6" title="Edit section: Dynamic asset allocation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Dynamic asset allocation is similar to strategic asset allocation in that portfolios are built by allocating to an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon.<sup id="cite_ref-idzorek1_3-1" class="reference"><a href="#cite_note-idzorek1-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> Like strategic allocation strategies, dynamic strategies largely retain exposure to their original asset classes; however, unlike strategic strategies, dynamic asset allocation portfolios will adjust their postures over time relative to changes in the economic environment. </p> <div class="mw-heading mw-heading3"><h3 id="Tactical_asset_allocation">Tactical asset allocation</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=7" title="Edit section: Tactical asset allocation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p><a href="/wiki/Tactical_asset_allocation" title="Tactical asset allocation">Tactical asset allocation</a> is a strategy in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for perceived gains.<sup id="cite_ref-blitz1_4-0" class="reference"><a href="#cite_note-blitz1-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-5" class="reference"><a href="#cite_note-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup> While an original asset mix is formulated much like strategic and dynamic portfolio, tactical strategies are often traded more actively and are free to move entirely in and out of their core asset classes. </p> <div class="mw-heading mw-heading3"><h3 id="Core-satellite_asset_allocation">Core-satellite asset allocation</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=8" title="Edit section: Core-satellite asset allocation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Core-satellite allocation strategies generally contain a 'core' strategic element making up the most significant portion of the portfolio, while applying a dynamic or tactical 'satellite' strategy that makes up a smaller part of the portfolio. In this way, core-satellite allocation strategies are a hybrid of the strategic and dynamic/tactical allocation strategies mentioned above.<sup id="cite_ref-6" class="reference"><a href="#cite_note-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Classification">Classification</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=9" title="Edit section: Classification"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>Industry sectors may be classified according to an industry classification taxonomy (such as the <a href="/wiki/Industry_Classification_Benchmark" title="Industry Classification Benchmark">Industry Classification Benchmark</a>).<sup id="cite_ref-7" class="reference"><a href="#cite_note-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-8" class="reference"><a href="#cite_note-8"><span class="cite-bracket">[</span>8<span class="cite-bracket">]</span></a></sup> The top-level sectors may be grouped as below: </p> <style data-mw-deduplicate="TemplateStyles:r1116488514">.mw-parser-output .treeview ul{padding:0;margin:0}.mw-parser-output .treeview li{padding:0;margin:0;list-style-type:none;list-style-image:none}.mw-parser-output .treeview li li{background:url("https://upload.wikimedia.org/wikipedia/commons/f/f2/Treeview-grey-line.png")no-repeat 0 -2981px;padding-left:21px;text-indent:0.3em}.mw-parser-output .treeview li li:last-child{background-position:0 -5971px}.mw-parser-output .treeview li.emptyline>ul>.mw-empty-elt:first-child+.emptyline,.mw-parser-output .treeview li.emptyline>ul>li:first-child{background-position:0 9px}</style><div class="treeview"> <ul><li>Morningstar X-ray<sup id="cite_ref-9" class="reference"><a href="#cite_note-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> <ul><li>Defensive <ul><li>Consumer Staples</li> <li>Health Care</li> <li>Utilities</li></ul></li> <li>Sensitive <ul><li>Energy</li> <li>Industrials</li> <li>Technology</li> <li>Telecommunications</li></ul></li> <li>Cyclical <ul><li>Consumer Discretionary</li> <li>Basic Materials</li> <li>Financials</li> <li>Real Estate</li></ul></li></ul></li></ul> </div> <p>Per the Tactical asset allocation strategy above, an investor may allocate more to cyclical sectors when the economy is showing gains, and more to defensive when it is not. </p> <div class="mw-heading mw-heading2"><h2 id="Academic_studies">Academic studies</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=10" title="Edit section: Academic studies"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>In 1986, <a href="/wiki/Gary_P._Brinson" title="Gary P. Brinson">Gary P. Brinson</a>, L. Randolph Hood, and <a href="/wiki/SEI_Investments_Company" title="SEI Investments Company">SEI's</a> Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large <a href="/wiki/Pension_fund" title="Pension fund">pension funds</a> measured from 1974 to 1983.<sup id="cite_ref-brinson1_10-0" class="reference"><a href="#cite_note-brinson1-10"><span class="cite-bracket">[</span>10<span class="cite-bracket">]</span></a></sup> They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly return was found to be higher than the pension plan's actual quarterly return. The two quarterly return series' linear <a href="/wiki/Financial_correlation" title="Financial correlation">correlation</a> was measured at 96.7%, with <a href="/wiki/Coefficient_of_determination" title="Coefficient of determination">shared variance</a> of 93.6%. A 1991 follow-up study by <a href="/wiki/Gary_P._Brinson" title="Gary P. Brinson">Brinson</a>, Singer, and Beebower measured variance of 91.5%.<sup id="cite_ref-bsb_11-0" class="reference"><a href="#cite_note-bsb-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup> The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study is incorrectly thought to have lumped together as "<a href="/wiki/Market_timing" title="Market timing">market timing</a>" but was actually policy selection.<sup id="cite_ref-statman_12-0" class="reference"><a href="#cite_note-statman-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> One problem with the <a href="/wiki/Gary_P._Brinson" title="Gary P. Brinson">Brinson</a> study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.<sup id="cite_ref-hood_13-0" class="reference"><a href="#cite_note-hood-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup> </p><p>In 1997, William Jahnke initiated a debate on this topic, attacking the BHB study in a paper titled "The Asset Allocation Hoax".<sup id="cite_ref-jahnke_14-0" class="reference"><a href="#cite_note-jahnke-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup> The Jahnke discussion appeared in the <i><a href="/wiki/Financial_Planning_Association" title="Financial Planning Association">Journal of Financial Planning</a></i> as an opinion piece, not a peer reviewed article. Jahnke's main criticism, still undisputed, was that BHB's use of quarterly data dampens the impact of compounding slight portfolio disparities over time, relative to the benchmark. One could compound 2% and 2.15% quarterly over 20 years and see the sizable difference in cumulative return. However, the difference is still 15 basis points (hundredths of a percent) per quarter; the difference is one of perception, not fact. </p><p>In 2000, <a href="/wiki/Roger_G._Ibbotson" title="Roger G. Ibbotson">Ibbotson</a> and Kaplan used five asset classes in their study "Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?".<sup id="cite_ref-ibbot1_15-0" class="reference"><a href="#cite_note-ibbot1-15"><span class="cite-bracket">[</span>15<span class="cite-bracket">]</span></a></sup> The asset classes included were large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash. Ibbotson and Kaplan examined the 10-year return of 94 US balanced <a href="/wiki/Mutual_fund" title="Mutual fund">mutual funds</a> versus the corresponding indexed returns. This time, after properly adjusting for the cost of running <a href="/wiki/Index_fund" title="Index fund">index funds</a>, the actual returns again failed to beat index returns. The linear correlation between monthly index return series and the actual monthly actual return series was measured at 90.2%, with shared variance of 81.4%. Ibbotson concluded 1) that asset allocation explained 40% of the variation of returns across funds, and 2) that it explained virtually 100% of the level of fund returns. <a href="/wiki/Gary_Brinson" class="mw-redirect" title="Gary Brinson">Gary Brinson</a> has expressed his general agreement with the Ibbotson-Kaplan conclusions. </p><p>In both studies, it is misleading to make statements such as "asset allocation explains 93.6% of investment return".<sup id="cite_ref-brown_16-0" class="reference"><a href="#cite_note-brown-16"><span class="cite-bracket">[</span>16<span class="cite-bracket">]</span></a></sup> Even "asset allocation explains 93.6% of quarterly performance variance" leaves much to be desired, because the shared variance could be from pension funds' operating structure.<sup id="cite_ref-ibbot1_15-1" class="reference"><a href="#cite_note-ibbot1-15"><span class="cite-bracket">[</span>15<span class="cite-bracket">]</span></a></sup> Hood, however, rejects this interpretation on the grounds that pension plans, in particular, cannot cross-share risks and that they are explicitly singular entities, rendering shared variance irrelevant.<sup id="cite_ref-hood_13-1" class="reference"><a href="#cite_note-hood-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup> The statistics were most helpful when used to demonstrate the similarity of the index return series and the actual return series. </p><p>A 2000 paper by Meir Statman found that using the same parameters that explained BHB's 93.6% variance result, a hypothetical financial advisor with perfect foresight in <i>tactical</i> asset allocation performed 8.1% better per year, yet the strategic asset allocation still explained 89.4% of the variance.<sup id="cite_ref-statman_12-1" class="reference"><a href="#cite_note-statman-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup> Thus, explaining variance does not explain performance. Statman says that strategic asset allocation is movement <i>along</i> the <a href="/wiki/Efficient_frontier" title="Efficient frontier">efficient frontier</a>, whereas tactical asset allocation involves movement <i>of</i> the efficient frontier. A more common sense explanation of the Brinson, Hood, and Beebower study is that asset allocation explains more than 90% of the volatility of returns of an overall portfolio, but will not explain the ending results of your portfolio over long periods of time. Hood notes in his review of the material over 20 years, however, that explaining performance over time is possible with the BHB approach but was not the focus of the original paper.<sup id="cite_ref-hood2_17-0" class="reference"><a href="#cite_note-hood2-17"><span class="cite-bracket">[</span>17<span class="cite-bracket">]</span></a></sup> </p><p>Bekkers, Doeswijk and Lam (2009) investigate the diversification benefits for a portfolio by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a <a href="/wiki/Market_portfolio" title="Market portfolio">market portfolio</a> approach. The results suggest that real estate, commodities, and high yield add the most value to the traditional asset mix of stocks, bonds, and cash. A study with such broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a <a href="/wiki/Mean-variance_analysis" class="mw-redirect" title="Mean-variance analysis">mean-variance analysis</a>, neither in assessing the global market portfolio.<sup id="cite_ref-bdl_18-0" class="reference"><a href="#cite_note-bdl-18"><span class="cite-bracket">[</span>18<span class="cite-bracket">]</span></a></sup> </p><p>Doeswijk, Lam and Swinkels (2014) argue that the portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the <a href="/wiki/Portfolio_optimization" title="Portfolio optimization">optimal portfolio</a> for the average investor. The authors determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, they estimate the invested global market portfolio for the period 1990 to 2012. For the main asset categories equities, real estate, non-government bonds, and government bonds they extend the period to 1959 until 2012.<sup id="cite_ref-19" class="reference"><a href="#cite_note-19"><span class="cite-bracket">[</span>19<span class="cite-bracket">]</span></a></sup> </p><p>Doeswijk, Lam and Swinkels (2019) show that the global market portfolio realizes a compounded real return of 4.45% per year with a standard deviation of 11.2% from 1960 until 2017. In the inflationary period from 1960 to 1979, the compounded real return of the global market portfolio is 3.24% per year, while this is 6.01% per year in the disinflationary period from 1980 to 2017. The average return during recessions was -1.96% per year, versus 7.72% per year during expansions. The reward for the average investor over the period 1960 to 2017 is a compounded return of 3.39% points above the risk-less rate earned by savers.<sup id="cite_ref-20" class="reference"><a href="#cite_note-20"><span class="cite-bracket">[</span>20<span class="cite-bracket">]</span></a></sup> </p><p>Historically, since the 20th century, <a href="/wiki/USA" class="mw-redirect" title="USA">US</a> equities have outperformed equities of other countries because of the <a href="/wiki/Competitive_advantage" title="Competitive advantage">competitive advantage</a> US has due to its large <a href="/wiki/GDP" class="mw-redirect" title="GDP">GDP</a>. </p> <div class="mw-heading mw-heading3"><h3 id="Performance_indicators">Performance indicators</h3><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=11" title="Edit section: Performance indicators"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>McGuigan described an examination of funds that were in the top quartile of performance during 1983 to 1993.<sup id="cite_ref-mcguigan_21-0" class="reference"><a href="#cite_note-mcguigan-21"><span class="cite-bracket">[</span>21<span class="cite-bracket">]</span></a></sup> During the second measurement period of 1993 to 2003, only 28.57% of the funds remained in the top quartile. 33.33% of the funds dropped to the second quartile. The rest of the funds dropped to the third or fourth quartile. </p><p>In fact, low cost was a more reliable indicator of performance. <a href="/wiki/John_Bogle" class="mw-redirect" title="John Bogle">Bogle</a> noted that an examination of five-year performance data of large-cap blend funds revealed that the lowest cost quartile funds had the best performance, and the highest cost quartile funds had the worst performance.<sup id="cite_ref-22" class="reference"><a href="#cite_note-22"><span class="cite-bracket">[</span>22<span class="cite-bracket">]</span></a></sup> </p> <div class="mw-heading mw-heading2"><h2 id="Return_versus_risk_trade-off">Return versus risk trade-off</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=12" title="Edit section: Return versus risk trade-off"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>In asset allocation planning, the decision on the amount of <a href="/wiki/Share_capital" title="Share capital">stocks</a> versus <a href="/wiki/Bond_(finance)" title="Bond (finance)">bonds</a> in one's portfolio is a very important decision. Simply buying stocks without regard of a possible <a href="/wiki/Bear_market" class="mw-redirect" title="Bear market">bear market</a> can result in <a href="/wiki/Panic_selling" title="Panic selling">panic selling</a> later. One's true <a href="/wiki/Risk_tolerance" class="mw-redirect" title="Risk tolerance">risk tolerance</a> can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key. </p> <table class="wikitable"> <tbody><tr> <th colspan="2">Cumulative return after inflation from 2000-to-2002 bear market<sup id="cite_ref-table1_23-0" class="reference"><a href="#cite_note-table1-23"><span class="cite-bracket">[</span>23<span class="cite-bracket">]</span></a></sup> </th></tr> <tr> <td>80% stock / 20% bond</td> <td>−34.35% </td></tr> <tr> <td>70% stock / 30% bond</td> <td>−25.81% </td></tr> <tr> <td>60% stock / 40% bond</td> <td>−19.99% </td></tr> <tr> <td>50% stock / 50% bond</td> <td>−13.87% </td></tr> <tr> <td>40% stock / 60% bond</td> <td>−7.46% </td></tr> <tr> <td>30% stock / 70% bond</td> <td>−0.74% </td></tr> <tr> <td>20% stock / 80% bond</td> <td>+6.29% </td></tr></tbody></table> <table class="wikitable"> <tbody><tr> <th colspan="2">Projected 10-year Cumulative return after inflation <br /> (stock return 8% yearly, bond return 4.5% yearly, inflation 3% yearly)<sup id="cite_ref-table2_24-0" class="reference"><a href="#cite_note-table2-24"><span class="cite-bracket">[</span>24<span class="cite-bracket">]</span></a></sup> </th></tr> <tr> <td>80% stock / 20% bond</td> <td>52% </td></tr> <tr> <td>70% stock / 30% bond</td> <td>47% </td></tr> <tr> <td>60% stock / 40% bond</td> <td>42% </td></tr> <tr> <td>50% stock / 50% bond</td> <td>38% </td></tr> <tr> <td>40% stock / 60% bond</td> <td>33% </td></tr> <tr> <td>30% stock / 70% bond</td> <td>29% </td></tr> <tr> <td>20% stock / 80% bond</td> <td>24% </td></tr></tbody></table> <p>The tables show why asset allocation is important. It determines an investor's future return, as well as the <a href="/wiki/Bear_market" class="mw-redirect" title="Bear market">bear market</a> burden that he or she will have to carry successfully to realize the returns. </p> <div class="mw-heading mw-heading2"><h2 id="Problems_with_asset_allocation">Problems with asset allocation</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=13" title="Edit section: Problems with asset allocation"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <p>There are various reasons why asset allocation fails to work. </p> <ul><li>Investor behavior is inherently <a href="/wiki/Bias" title="Bias">biased</a>. Even though investor chooses an asset allocation, implementation is a challenge.</li> <li>Investors agree to asset allocation, but after some good returns, they decide that they really wanted more risk.</li> <li>Investors agree to asset allocation, but after some bad returns, they decide that they really wanted less risk.</li> <li>Investors' risk tolerance is not knowable ahead of time.</li> <li>Security selection within asset classes will not necessarily produce a risk profile equal to the asset class.</li> <li>The long-run behavior of asset classes does not guarantee their shorter-term behavior.</li> <li>Different assets are subject to distinct tax treatments and regulatory considerations, which can make asset allocation decisions more complex.</li> <li>Frequent asset class rebalancing and maintaining a diversified portfolio can lead to substantial costs and fees, which may reduce overall returns.</li> <li>Accurately predicting the optimal times to invest in or sell out of various asset classes is difficult, and poor timing can adversely affect returns.</li></ul> <div class="mw-heading mw-heading2"><h2 id="See_also">See also</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=14" title="Edit section: See also"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <ul><li><a href="/wiki/Asset_location" title="Asset location">Asset location</a></li> <li><a href="/wiki/Economic_capital" title="Economic capital">Economic capital</a></li> <li><a href="/wiki/Efficient-market_hypothesis" title="Efficient-market hypothesis">Efficient-market hypothesis</a></li> <li><a href="/wiki/Performance_attribution" title="Performance attribution">Performance attribution</a></li> <li><a href="/wiki/Financial_risk_management#Investment_management" title="Financial risk management">Financial risk management § Investment management</a></li></ul> <div class="mw-heading mw-heading2"><h2 id="References">References</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=15" title="Edit section: References"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <style data-mw-deduplicate="TemplateStyles:r1239543626">.mw-parser-output .reflist{margin-bottom:0.5em;list-style-type:decimal}@media screen{.mw-parser-output .reflist{font-size:90%}}.mw-parser-output .reflist .references{font-size:100%;margin-bottom:0;list-style-type:inherit}.mw-parser-output .reflist-columns-2{column-width:30em}.mw-parser-output .reflist-columns-3{column-width:25em}.mw-parser-output .reflist-columns{margin-top:0.3em}.mw-parser-output .reflist-columns ol{margin-top:0}.mw-parser-output .reflist-columns li{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .reflist-upper-alpha{list-style-type:upper-alpha}.mw-parser-output .reflist-upper-roman{list-style-type:upper-roman}.mw-parser-output .reflist-lower-alpha{list-style-type:lower-alpha}.mw-parser-output .reflist-lower-greek{list-style-type:lower-greek}.mw-parser-output .reflist-lower-roman{list-style-type:lower-roman}</style><div class="reflist"> <div class="mw-references-wrap mw-references-columns"><ol class="references"> <li id="cite_note-investopedia.com-1"><span class="mw-cite-backlink">^ <a href="#cite_ref-investopedia.com_1-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-investopedia.com_1-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text"><style data-mw-deduplicate="TemplateStyles:r1238218222">.mw-parser-output cite.citation{font-style:inherit;word-wrap:break-word}.mw-parser-output .citation q{quotes:"\"""\"""'""'"}.mw-parser-output .citation:target{background-color:rgba(0,127,255,0.133)}.mw-parser-output .id-lock-free.id-lock-free a{background:url("//upload.wikimedia.org/wikipedia/commons/6/65/Lock-green.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-limited.id-lock-limited a,.mw-parser-output .id-lock-registration.id-lock-registration a{background:url("//upload.wikimedia.org/wikipedia/commons/d/d6/Lock-gray-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-subscription.id-lock-subscription a{background:url("//upload.wikimedia.org/wikipedia/commons/a/aa/Lock-red-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .cs1-ws-icon a{background:url("//upload.wikimedia.org/wikipedia/commons/4/4c/Wikisource-logo.svg")right 0.1em center/12px no-repeat}body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-free a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-limited a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-registration a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-subscription a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .cs1-ws-icon a{background-size:contain;padding:0 1em 0 0}.mw-parser-output .cs1-code{color:inherit;background:inherit;border:none;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;color:var(--color-error,#d33)}.mw-parser-output .cs1-visible-error{color:var(--color-error,#d33)}.mw-parser-output .cs1-maint{display:none;color:#085;margin-left:0.3em}.mw-parser-output .cs1-kern-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right{padding-right:0.2em}.mw-parser-output .citation .mw-selflink{font-weight:inherit}@media screen{.mw-parser-output .cs1-format{font-size:95%}html.skin-theme-clientpref-night .mw-parser-output .cs1-maint{color:#18911f}}@media screen and (prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .cs1-maint{color:#18911f}}</style><cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://www.investopedia.com/terms/a/assetallocation.asp#ixzz1QTuSzfhn">"Asset Allocation Definition"</a>. Investopedia<span class="reference-accessdate">. Retrieved <span class="nowrap">27 June</span> 2011</span>.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Abook&rft.genre=unknown&rft.btitle=Asset+Allocation+Definition&rft.pub=Investopedia&rft_id=http%3A%2F%2Fwww.investopedia.com%2Fterms%2Fa%2Fassetallocation.asp%23ixzz1QTuSzfhn&rfr_id=info%3Asid%2Fen.wikipedia.org%3AAsset+allocation" class="Z3988"></span></span> </li> <li id="cite_note-2"><span class="mw-cite-backlink"><b><a href="#cite_ref-2">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://web.archive.org/web/20110711054120/http://www.fundadvice.com/sound-investing-tv/episodes/sitv-5.3.10.html">"Is there really no such thing as a free lunch?"</a>. FundAdvice.com. 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Clay, <i>Core-Satellite Portfolio Management: A Modern Approach for Professionally Managed Funds</i>, McGraw-Hill 2004</span> </li> <li id="cite_note-7"><span class="mw-cite-backlink"><b><a href="#cite_ref-7">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://www.icbenchmark.com">"Industry Classification Benchmark (ICB)"</a>. <i>icbenchmark.com</i>. 21 June 2017.</cite><span title="ctx_ver=Z39.88-2004&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=unknown&rft.jtitle=icbenchmark.com&rft.atitle=Industry+Classification+Benchmark+%28ICB%29&rft.date=2017-06-21&rft_id=http%3A%2F%2Fwww.icbenchmark.com&rfr_id=info%3Asid%2Fen.wikipedia.org%3AAsset+allocation" class="Z3988"></span></span> </li> <li id="cite_note-8"><span class="mw-cite-backlink"><b><a href="#cite_ref-8">^</a></b></span> <span class="reference-text"><link rel="mw-deduplicated-inline-style" href="mw-data:TemplateStyles:r1238218222"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://web.archive.org/web/20140326094518/http://www.msci.com/products/indices/sector/gics/">"MSCI-Barra GICS Tables"</a>. 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(August 2024)">bare URL PDF</span></a></i>]</sup></span> </li> <li id="cite_note-brinson1-10"><span class="mw-cite-backlink"><b><a href="#cite_ref-brinson1_10-0">^</a></b></span> <span class="reference-text"><a href="/wiki/Gary_P._Brinson" title="Gary P. Brinson">Gary P. Brinson</a>, L. Randolph Hood, and Gilbert L. Beebower, "Determinants of Portfolio Performance", <i>The Financial Analysts Journal</i>, July/August 1986.</span> </li> <li id="cite_note-bsb-11"><span class="mw-cite-backlink"><b><a href="#cite_ref-bsb_11-0">^</a></b></span> <span class="reference-text"><a href="/wiki/Gary_P._Brinson" title="Gary P. Brinson">Gary P. Brinson</a>, Brian D. Singer, and Gilbert L. Beebower, <i>Determinants of Portfolio Performance II: An Update</i>, The Financial Analysts Journal, 47, 3 (1991).</span> </li> <li id="cite_note-statman-12"><span class="mw-cite-backlink">^ <a href="#cite_ref-statman_12-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-statman_12-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text">Meir Statman, "The 93.6% Question of Financial Advisors", <i><a href="/wiki/The_Journal_of_Investing" title="The Journal of Investing">The Journal of Investing</a></i>, Spring 2000, Vol. 9, No. 1: pp. 16–20</span> </li> <li id="cite_note-hood-13"><span class="mw-cite-backlink">^ <a href="#cite_ref-hood_13-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-hood_13-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text">L. Randolph Hood, "Response to Letter to the Editor", <i>The Financial Analysts Journal</i> 62/1, January/February 2006</span> </li> <li id="cite_note-jahnke-14"><span class="mw-cite-backlink"><b><a href="#cite_ref-jahnke_14-0">^</a></b></span> <span class="reference-text">William Jahnke, "The Asset Allocation Hoax", <i><a href="/wiki/Financial_Planning_Association" title="Financial Planning Association">Journal of Financial Planning</a></i>, February 1997</span> </li> <li id="cite_note-ibbot1-15"><span class="mw-cite-backlink">^ <a href="#cite_ref-ibbot1_15-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-ibbot1_15-1"><sup><i><b>b</b></i></sup></a></span> <span class="reference-text">Roger G. Ibbotson and Paul D. Kaplan, "Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?", <i>The Financial Analysts Journal</i>, January/February 2000</span> </li> <li id="cite_note-brown-16"><span class="mw-cite-backlink"><b><a href="#cite_ref-brown_16-0">^</a></b></span> <span class="reference-text">James Dean Brown, "The coefficient of determination", <i>Shiken: JALT Testing & Evaluation SIG Newsletter</i>, vol. 7, no. 1, March 2003.</span> </li> <li id="cite_note-hood2-17"><span class="mw-cite-backlink"><b><a href="#cite_ref-hood2_17-0">^</a></b></span> <span class="reference-text">L. Randolph Hood, "Determinants of Portfolio Performance – 20 Years Later", <i>The Financial Analysts Journal</i>, 61/5 September/October 2005.</span> </li> <li id="cite_note-bdl-18"><span class="mw-cite-backlink"><b><a href="#cite_ref-bdl_18-0">^</a></b></span> <span class="reference-text">Bekkers Niels, Doeswijk Ronald Q. and Lam Trevin, <a rel="nofollow" class="external text" href="https://ssrn.com/abstract=1368689">Strategic "Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes"</a>, <i><a href="/wiki/The_Journal_of_Wealth_Management" title="The Journal of Wealth Management">The Journal of Wealth Management</a></i>, vol. 12, no. 3, pp. 61-77, 2009.</span> </li> <li id="cite_note-19"><span class="mw-cite-backlink"><b><a href="#cite_ref-19">^</a></b></span> <span class="reference-text">Doeswijk Ronald Q., Lam Trevin and Swinkels Laurens, <a rel="nofollow" class="external text" href="https://ssrn.com/abstract=2352932">"Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959–2012"</a>, <i><a href="/wiki/Financial_Analysts_Journal" title="Financial Analysts Journal">Financial Analysts Journal</a></i>, 70(2), pp. 26–41, 2014</span> </li> <li id="cite_note-20"><span class="mw-cite-backlink"><b><a href="#cite_ref-20">^</a></b></span> <span class="reference-text">Doeswijk Ronald Q., Lam Trevin and Swinkels Laurens, <a rel="nofollow" class="external text" href="https://ssrn.com/abstract=2978509">"Historical Returns of the Market Portfolio", Working Paper</a></span> </li> <li id="cite_note-mcguigan-21"><span class="mw-cite-backlink"><b><a href="#cite_ref-mcguigan_21-0">^</a></b></span> <span class="reference-text">Thomas P. McGuigan, "The Difficulty of Selecting Superior Mutual Fund Performance", <i><a href="/wiki/Financial_Planning_Association" title="Financial Planning Association">Journal of Financial Planning</a></i>, February 2006.</span> </li> <li id="cite_note-22"><span class="mw-cite-backlink"><b><a href="#cite_ref-22">^</a></b></span> <span class="reference-text"><a rel="nofollow" class="external text" href="http://johncbogle.com/speeches/JCB_Morningstar_6-97.pdf">The Implications of Style Analysis on Mutual Fund Performance Evaluation</a></span> </li> <li id="cite_note-table1-23"><span class="mw-cite-backlink"><b><a href="#cite_ref-table1_23-0">^</a></b></span> <span class="reference-text">Stock return from a <a href="/wiki/Wilshire_5000" title="Wilshire 5000">Wilshire 5000</a> index fund; bond return from a <a href="/wiki/Barclays_Capital_Aggregate_Bond_Index" class="mw-redirect" title="Barclays Capital Aggregate Bond Index">Barclays Capital Aggregate Bond Index</a> fund; <a href="/wiki/Inflation" title="Inflation">inflation</a> data from US Treasury Department.</span> </li> <li id="cite_note-table2-24"><span class="mw-cite-backlink"><b><a href="#cite_ref-table2_24-0">^</a></b></span> <span class="reference-text">Input parameters are for illustration purpose only; actual returns will vary.</span> </li> </ol></div></div> <div class="mw-heading mw-heading2"><h2 id="External_links">External links</h2><span class="mw-editsection"><span class="mw-editsection-bracket">[</span><a href="/w/index.php?title=Asset_allocation&action=edit&section=16" title="Edit section: External links"><span>edit</span></a><span class="mw-editsection-bracket">]</span></span></div> <style data-mw-deduplicate="TemplateStyles:r1235681985">.mw-parser-output .side-box{margin:4px 0;box-sizing:border-box;border:1px solid #aaa;font-size:88%;line-height:1.25em;background-color:var(--background-color-interactive-subtle,#f8f9fa);display:flow-root}.mw-parser-output .side-box-abovebelow,.mw-parser-output .side-box-text{padding:0.25em 0.9em}.mw-parser-output .side-box-image{padding:2px 0 2px 0.9em;text-align:center}.mw-parser-output .side-box-imageright{padding:2px 0.9em 2px 0;text-align:center}@media(min-width:500px){.mw-parser-output .side-box-flex{display:flex;align-items:center}.mw-parser-output .side-box-text{flex:1;min-width:0}}@media(min-width:720px){.mw-parser-output .side-box{width:238px}.mw-parser-output .side-box-right{clear:right;float:right;margin-left:1em}.mw-parser-output .side-box-left{margin-right:1em}}</style><style data-mw-deduplicate="TemplateStyles:r1237033735">@media print{body.ns-0 .mw-parser-output .sistersitebox{display:none!important}}@media screen{html.skin-theme-clientpref-night .mw-parser-output .sistersitebox img[src*="Wiktionary-logo-en-v2.svg"]{background-color:white}}@media screen and (prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .sistersitebox img[src*="Wiktionary-logo-en-v2.svg"]{background-color:white}}</style><div class="side-box side-box-right plainlinks sistersitebox"><style data-mw-deduplicate="TemplateStyles:r1126788409">.mw-parser-output .plainlist ol,.mw-parser-output .plainlist ul{line-height:inherit;list-style:none;margin:0;padding:0}.mw-parser-output .plainlist ol li,.mw-parser-output .plainlist ul li{margin-bottom:0}</style> <div class="side-box-flex"> <div class="side-box-image"><span class="noviewer" typeof="mw:File"><span><img alt="" src="//upload.wikimedia.org/wikipedia/commons/thumb/d/df/Wikibooks-logo-en-noslogan.svg/40px-Wikibooks-logo-en-noslogan.svg.png" decoding="async" width="40" height="40" class="mw-file-element" srcset="//upload.wikimedia.org/wikipedia/commons/thumb/d/df/Wikibooks-logo-en-noslogan.svg/60px-Wikibooks-logo-en-noslogan.svg.png 1.5x, //upload.wikimedia.org/wikipedia/commons/thumb/d/df/Wikibooks-logo-en-noslogan.svg/80px-Wikibooks-logo-en-noslogan.svg.png 2x" data-file-width="400" data-file-height="400" /></span></span></div> <div class="side-box-text plainlist">Wikibooks has more on the topic of: <i><b><a href="https://en.wikibooks.org/wiki/Special:Search/Asset_allocation" class="extiw" title="wikibooks:Special:Search/Asset allocation">Asset allocation</a></b></i></div></div> </div> <ul><li><a rel="nofollow" class="external text" href="https://web.archive.org/web/20160308082419/http://www.multiwealth.co.uk/performance">Asset allocation performance</a></li> <li><a rel="nofollow" class="external text" href="https://www.bogleheads.org/wiki/Lazy_portfolios">Model portfolios for buy and hold index investors</a></li> <li><a rel="nofollow" class="external text" href="https://web.archive.org/web/20080129073847/http://www.fulcruminquiry.com/allocation.htm">Calculator for determining allocation of retirement assets, and related risk questionnaire</a></li> <li><a rel="nofollow" class="external text" href="https://web.archive.org/web/20161013080459/http://sporkforge.com/finance/asset_alloc.php">Calculator which determines future asset mix based on differing growth rates and contributions</a></li></ul> <div class="navbox-styles"><style data-mw-deduplicate="TemplateStyles:r1129693374">.mw-parser-output .hlist dl,.mw-parser-output .hlist ol,.mw-parser-output .hlist ul{margin:0;padding:0}.mw-parser-output .hlist dd,.mw-parser-output .hlist dt,.mw-parser-output .hlist li{margin:0;display:inline}.mw-parser-output .hlist.inline,.mw-parser-output .hlist.inline dl,.mw-parser-output .hlist.inline ol,.mw-parser-output .hlist.inline ul,.mw-parser-output .hlist dl dl,.mw-parser-output .hlist dl ol,.mw-parser-output .hlist dl ul,.mw-parser-output .hlist ol dl,.mw-parser-output .hlist ol ol,.mw-parser-output .hlist ol ul,.mw-parser-output .hlist ul dl,.mw-parser-output .hlist ul ol,.mw-parser-output .hlist ul ul{display:inline}.mw-parser-output .hlist .mw-empty-li{display:none}.mw-parser-output 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risk">Basis risk</a>, <a href="/wiki/Shape_risk" title="Shape risk">Shape risk</a>, <a href="/wiki/Holding_period_risk" title="Holding period risk">Holding period risk</a>, <a href="/wiki/Price_area_risk" class="mw-redirect" title="Price area risk">Price area risk</a>)</li> <li><a href="/wiki/Equity_risk" title="Equity risk">Equity risk</a></li> <li><a href="/wiki/Valuation_risk" title="Valuation risk">Valuation risk</a></li> <li><a href="/wiki/Foreign_exchange_risk" title="Foreign exchange risk">FX risk</a></li> <li><a href="/wiki/Margining_risk" title="Margining risk">Margining risk</a></li> <li><a href="/wiki/Interest_rate_risk" title="Interest rate risk">Interest rate risk</a></li> <li><a href="/wiki/Inflation_risk" class="mw-redirect" title="Inflation risk">Inflation risk</a></li> <li><a href="/wiki/Volatility_risk" title="Volatility risk">Volatility risk</a></li> <li><a href="/wiki/Liquidity_risk" title="Liquidity risk">Liquidity risk</a> (e.g. <a href="/wiki/Refinancing_risk" title="Refinancing risk">Refinancing risk</a>, <a href="/wiki/Deposit_risk" title="Deposit risk">Deposit risk</a>)</li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="/wiki/Operational_risk" title="Operational risk">Operational risk</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Operational_risk_management" title="Operational risk management">Operational risk management</a></li> <li><a href="/wiki/Business_risk" class="mw-redirect" title="Business risk">Business risk</a></li> <li><a href="/wiki/Model_risk" title="Model risk">Model risk</a></li> <li><a href="/wiki/Reputational_risk" class="mw-redirect" title="Reputational risk">Reputational risk</a></li> <li><a href="/wiki/Country_risk" title="Country risk">Country risk</a></li> <li><a href="/wiki/Political_risk" title="Political risk">Political risk</a></li> <li><a href="/wiki/Legal_risk" title="Legal risk">Legal risk</a></li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Other</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Execution_risk" class="mw-redirect" title="Execution risk">Execution risk</a></li> <li><a href="/wiki/Profit_risk" title="Profit risk">Profit risk</a></li> <li><a href="/wiki/Systemic_risk" title="Systemic risk">Systemic risk</a></li> <li><a href="/wiki/Non-financial_risk" title="Non-financial risk">Non-financial risk</a></li></ul> </div></td></tr></tbody></table><div></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="/wiki/Financial_risk_modeling" title="Financial risk modeling">Modeling</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a href="/wiki/Arbitrage_pricing_theory" title="Arbitrage pricing theory">Arbitrage pricing theory</a></li> <li><a href="/wiki/Black%E2%80%93Scholes_model" title="Black–Scholes model">Black–Scholes model</a></li> <li><a href="/wiki/Replicating_portfolio" title="Replicating portfolio">Replicating portfolio</a></li> <li><a href="/wiki/Cashflow_matching" title="Cashflow matching">Cash flow matching</a></li> <li><a href="/wiki/Expected_shortfall" title="Expected shortfall">Conditional Value-at-Risk (CVaR)</a></li> <li><a href="/wiki/Copula_(probability_theory)" class="mw-redirect" title="Copula (probability theory)">Copula</a></li> <li><a href="/wiki/Drawdown_(economics)" title="Drawdown (economics)">Drawdown</a></li> <li><a href="/wiki/First-hitting-time_model" title="First-hitting-time model">First-hitting-time model</a></li> <li><a href="/wiki/Immunization_(finance)" title="Immunization (finance)">Interest rate immunization</a></li> <li><a href="/wiki/Market_portfolio" title="Market portfolio">Market portfolio</a></li> <li><a href="/wiki/Modern_portfolio_theory" title="Modern portfolio theory">Modern portfolio theory</a></li> <li><a href="/wiki/Omega_ratio" title="Omega ratio">Omega ratio</a></li> <li><a href="/wiki/Risk-adjusted_return_on_capital" title="Risk-adjusted return on capital">RAROC</a></li> <li><a href="/wiki/Risk-free_interest_rate" class="mw-redirect" title="Risk-free interest rate">Risk-free rate</a></li> <li><a href="/wiki/Risk_parity" title="Risk parity">Risk parity</a></li> <li><a href="/wiki/Sharpe_ratio" title="Sharpe ratio">Sharpe ratio</a></li> <li><a href="/wiki/Sortino_ratio" title="Sortino ratio">Sortino ratio</a></li> <li><a href="/wiki/Survival_analysis" title="Survival analysis">Survival analysis</a> (<a href="/wiki/Proportional_hazards_model" title="Proportional hazards model">Proportional hazards model</a>)</li> <li><a href="/wiki/Tracking_error" title="Tracking error">Tracking error</a></li> <li><a href="/wiki/Value_at_risk" title="Value at risk">Value-at-Risk (VaR)</a> and extensions (<a href="/wiki/Profit_at_risk" title="Profit at risk">Profit at risk</a>, <a href="/wiki/Margin_at_risk" title="Margin at risk">Margin at risk</a>, <a href="/wiki/Liquidity_at_risk" title="Liquidity at risk">Liquidity at risk</a>, <a href="/wiki/Cash_flow_at_risk" class="mw-redirect" title="Cash flow at risk">Cash flow at risk</a>, <a href="/wiki/Earnings_at_risk" title="Earnings at risk">Earnings at risk</a>)</li></ul> </div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Basic concepts</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em"> <ul><li><a class="mw-selflink selflink">Asset allocation</a></li> <li><a href="/wiki/Asset_and_liability_management" title="Asset and liability management">Asset and liability management</a></li> <li><a href="/wiki/Asset_pricing" title="Asset pricing">Asset pricing</a></li> <li><a href="/wiki/Bad_debt" title="Bad debt">Bad debt</a></li> <li><a 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<ul><li><a href="/wiki/Financial_adviser" title="Financial adviser">adviser</a></li> <li><a href="/wiki/Financial_analysis" title="Financial analysis">analysis</a></li> <li><a href="/wiki/Financial_analyst" title="Financial analyst">analyst</a></li> <li><a href="/wiki/Financial_asset" title="Financial asset">asset</a></li> <li><a href="/wiki/Financial_betting" title="Financial betting">betting</a></li> <li><a href="/wiki/Financial_crime" title="Financial crime">crime</a></li> <li><a href="/wiki/Financial_engineering" title="Financial engineering">engineering</a></li> <li><a href="/wiki/Financial_law" title="Financial law">law</a></li> <li><a href="/wiki/Financial_risk" title="Financial risk">risk</a></li> <li><a href="/wiki/Financial_social_work" title="Financial social work">social work</a></li></ul></li> <li><a href="/wiki/Fundamental_analysis" title="Fundamental analysis">Fundamental analysis</a></li> <li><a href="/wiki/Growth_investing" title="Growth investing">Growth investing</a></li> <li><a href="/wiki/Hazard" title="Hazard">Hazard</a></li> <li><a href="/wiki/Hedge_(finance)" title="Hedge (finance)">Hedge</a></li> <li><a href="/wiki/Investment_management" title="Investment management">Investment management</a></li> <li><a href="/wiki/Risk" title="Risk">Risk</a></li> <li><a href="/wiki/Risk_pool" title="Risk pool">Risk pool</a></li> <li><a href="/wiki/Risk_of_ruin" title="Risk of ruin">Risk of ruin</a></li> <li><a href="/wiki/Systematic_risk" title="Systematic risk">Systematic risk</a></li> <li><a href="/wiki/Mathematical_finance" title="Mathematical finance">Mathematical finance</a></li> <li><a href="/wiki/Moral_hazard" title="Moral hazard">Moral hazard</a></li> <li><a href="/wiki/Risk-return_spectrum" class="mw-redirect" title="Risk-return spectrum">Risk-return spectrum</a></li> <li><a href="/wiki/Speculation" title="Speculation">Speculation</a></li> <li><a href="/wiki/Speculative_attack" title="Speculative attack">Speculative attack</a></li> 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