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Asset Allocation: A Handbook of Portfolio Po

Asset Allocation: A Handbook of Portfolio Policies, Strategies and Tactics

Robert D. Arnott, Frank J. Fabozzi
1988
T2 430 pages · about 7h 10m to read Open Librarygoodreads

Summary

The reference has not verified this book in detail; the summary states only what the title, author and subject establish.

This is an edited handbook on asset allocation compiled by Fabozzi, with contributions from practitioners and academics. The reference has not verified the individual chapters.

The subject covers how a portfolio should be divided among asset classes and how that division should be maintained or varied. The analytical territory includes mean-variance optimisation and the practical difficulties in applying it, principally the extreme sensitivity of the resulting weights to estimated expected returns; methods for reducing the effect of estimation error including shrinkage, resampling and the combination of equilibrium weights with investor views; the distinction between strategic allocation set for the long horizon and tactical variation around it; rebalancing policy and its contribution to returns; and the implementation of allocation through cash instruments or derivatives.

Additional territory in such a handbook typically includes liability-driven allocation for institutions with defined obligations, the treatment of illiquid asset classes within an allocation framework, the horizon dependence of asset class risk, and downside risk measures as alternatives to variance.

The empirical result that motivates the field is that allocation across asset classes explains most of the variation in a portfolio's returns over time, which was established by Brinson and colleagues and has been repeatedly re-examined and refined since.

Readers should consult the table of contents to identify the relevant chapters and should note that the practical toolkit has changed with the availability of low-cost index instruments, with risk parity approaches and with factor-based allocation frameworks that treat asset classes as bundles of underlying risk exposures.

Key takeaways 7

  1. Allocation among asset classes explains most of the variation in a portfolio's returns over time.
  2. Mean-variance optimisation produces weights extremely sensitive to estimated expected returns, which makes direct application unusable.
  3. Estimating the inputs rather than performing the optimisation is where the difficulty in allocation actually sits.
  4. Strategic allocation and tactical deviation are distinct decisions requiring separate justification and separate measurement.
  5. Rebalancing policy contributes to returns and should be set deliberately rather than left to convention.
  6. Illiquid asset classes cannot be treated within the same framework as liquid ones, because their reported volatility is an artefact of infrequent valuation.
  7. Factor-based approaches treat asset classes as bundles of underlying risk exposures, which changes what diversification means.

Who should read it

Practitioners working on portfolio allocation who need a reference on the methods, verified against the current toolkit.

About Robert D. Arnott

Founder and Chairman, Research Affiliates (rebranded Syzygy Asset Management, 2026); former CEO of First Quadrant; former editor of the Financial Analysts Journal

Fundamental Indexation launched the smart-beta industry and The Fundamental Index turned it into a book that outlived its news cycle, on top of a long asset-management record.

Research Affiliates, First Quadrant, Financial Analysts Journal

Robert D. Arnott’s page →Research Affiliates →First Quadrant →Financial Analysts Journal →

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Where it sits in the reference 2

Robert D. Arnott
Investors
Frank J. Fabozzi
Academics

Topics

Investing