Abstract:
This study investigated the impact on performance of asset allocation policy relative to active management and market movement. In aggregate, 100 percent of return levels come from asset allocation, for aggregate return levels, asset allocation has the highest explanatory power. Most of the portfolio variation using both time-series and cross sectional regressions (around 80 percent) comes from general market movement. After the removal of market movements, asset allocation and active management play an almost equal important role in determining portfolio return differences within a peer group. The findings of this study suggest that establishing an asset allocation policy consistent with an investor’s goals, investment horizon, and risk tolerance must be the first priority for fund managers and sponsors.
