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The Journal of Portfolio Management

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Article

Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals

Peng Wang and Jon Spinney
The Journal of Portfolio Management Fall 2017, 44 (1) 69-82; DOI: https://doi.org/10.3905/jpm.2017.44.1.069
Peng Wang
is the head of portfolio research at Covariance Capital Management in Houston, TX
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Jon Spinney
is the chief investment officer at Vestcor Investment Management in Fredericton, New Brunswick, Canada
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Abstract

The authors build on traditional mean–variance optimization with a quantitative framework for combining the best of science and judgment in selecting an asset allocation for long-horizon investors such as endowments. The novelty of their approach lies in its ability to balance the desire for long-term returns with the need to manage short-term risk and funding constraints—important goals that are often in conflict. To reap the benefits of long-term risk premia, investors must be able to withstand occasional short-term painful drawdowns. The authors show how their unified approach can be used to examine how different combinations of asset classes, spending rates, and even alpha impact the policy portfolio over various planning horizons. The framework merges the science of portfolio optimization with a structure that informs sound judgment in determining an organization’s strategic asset allocation and spending policies.

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The Journal of Portfolio Management: 44 (1)
The Journal of Portfolio Management
Vol. 44, Issue 1
Fall 2017
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Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals
Peng Wang, Jon Spinney
The Journal of Portfolio Management Oct 2017, 44 (1) 69-82; DOI: 10.3905/jpm.2017.44.1.069

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Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals
Peng Wang, Jon Spinney
The Journal of Portfolio Management Oct 2017, 44 (1) 69-82; DOI: 10.3905/jpm.2017.44.1.069
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  • Article
    • Abstract
    • PORTFOLIO SELECTION THEORY
    • AN ASSET ALLOCATION FRAMEWORK THAT BALANCES BOTH SHORT-TERM AND LONG-TERM OBJECTIVES
    • DATA AND SIMULATION APPROACH
    • DETERMINING THE POLICY PORTFOLIO: PROBABILISTIC RISK FRONTIERS
    • EXTENDING THE MODEL TO INCLUDE ALPHA AND SPENDING
    • VERY LONG-TERM PROJECTIONS
    • CONCLUSION
    • APPENDIX A
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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