A Framework for Examining Asset Allocation Alpha
Journal of Index Investing, vol. 3, no. 4 (Spring 2013), pp. 64-72
Posted: 11 Jan 2013 Last revised: 28 Dec 2016
Date Written: December 20, 2012
Abstract
Despite the large body of literature on the importance of asset allocation as a primary determinant of portfolio performance, the definition of asset allocation “alpha” remains a poorly defined concept. In this article, we show that a portfolio’s total alpha can be decomposed into alpha from asset allocation and manager selection. The asset allocation alpha can then be further attributed to value-add from:
1) taking additional risk exposure relative to the policy portfolio,
2) exploiting the relative value differential between assets with similar risk exposures, and
3) timing the cyclicality in risk premia.
Keywords: asset allocation, alpha, portfolio performance
JEL Classification: G10, G11
Suggested Citation: Suggested Citation