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Cost of Asset Allocation in Equity Market: How Much Do Investors Lose Due to Bad Asset Class Design?

Woo Chang Kim, Yongjae Lee and Yoon Hak Lee
The Journal of Portfolio Management Fall 2014, 41 (1) 34-44; DOI: https://doi.org/10.3905/jpm.2014.41.1.034
Woo Chang Kim
is an associate professor in the Department of Industrial and Systems Engineering at the Korea Advanced Institute of Science and Technology (KAIST) in Yuseong-Gu, Daejeon, Republic of Korea.
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  • For correspondence: wkim@kaist.ac.kr
Yongjae Lee
is a PhD candidate in the Department of Industrial and Systems Engineering at the Korea Advanced Institute of Science and Technology (KAIST) in Yuseong-Gu, Daejeon, Republic of Korea.
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  • For correspondence: yongjae.lee@kaist.ac.kr
Yoon Hak Lee
is a PhD candidate in the Department of Industrial and Systems Engineering at the Korea Advanced Institute of Science and Technology (KAIST) in Yuseong-Gu, Daejeon, Republic of Korea.
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  • For correspondence: yhl3145@gmail.com
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Abstract

Many investors employ asset allocation, even though most are not really concerned about how their asset classification schemes affect investment performance. This article extensively examines the two most widely employed within-stock classifications: styles and industry classification. In order to explicitly measure current classifications’ performance levels, the authors introduce the concept of optimal asset classification, which provides the upper performance limit of any classification scheme. They find that style and industry classification are very costly. Furthermore, factor analysis reveals that the immediate cause of exorbitant cost lies in the method on which classification focuses.

TOPICS: Equity portfolio management, in markets, exchanges/markets/clearinghouses

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The Journal of Portfolio Management: 41 (1)
The Journal of Portfolio Management
Vol. 41, Issue 1
Fall 2014
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Cost of Asset Allocation in Equity Market: How Much Do Investors Lose Due to Bad Asset Class Design?
Woo Chang Kim, Yongjae Lee, Yoon Hak Lee
The Journal of Portfolio Management Oct 2014, 41 (1) 34-44; DOI: 10.3905/jpm.2014.41.1.034

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Cost of Asset Allocation in Equity Market: How Much Do Investors Lose Due to Bad Asset Class Design?
Woo Chang Kim, Yongjae Lee, Yoon Hak Lee
The Journal of Portfolio Management Oct 2014, 41 (1) 34-44; DOI: 10.3905/jpm.2014.41.1.034
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  • Article
    • Abstract
    • CURRENT WITHIN-STOCK CLASSIFICATIONS: STYLE AND INDUSTRY
    • OPTIMAL ASSET CLASSIFICATION
    • FORMULATION
    • COST OF ASSET ALLOCATION
    • CONCLUSION
    • ENDNOTE
    • REFERENCES
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