Economic downturns and the determination of portfolio asset allocation

Syed Salim, Syed Mohd Na'im B.

Abstract

A most common question in finance, particularly in
investment perspective, is how an investor should allocate
his wealth. Robert C. Merton (1975) remarks that the quest
for an answer to the problem of lifetime consumption and
portfolio selection under uncertainty is the beginning point
for the development of a theory of Finance.
This research looks into the possibility of forming
effective/profitable portfolio asset allocation during
economic downturns which occurred in the period between
year 1993 and 2008. We employ out-of-sample forecasting
techniques using time-varying factors of constants (alpha)
and asset sensitivities (beta) over the market and
covariance/correlation in asset allocation.
In addition, we also investigate if economic indicators have
had any effect on forming asset allocation, particularly the
stock markets. It is found that out of 24 portfolio asset
allocation strategies investigated; two strategies provide
superior return over risk results. The research also reveals
that the incorporation of economic indicators has improved
our model significantly.
This research contributes to the present literature through
recommendations for achieving better portfolio's return
forecasts. It is intended that the findings will strengthen the
practicability of Markowitz's Mean Variance theory and
Sharpe's and Lintner's Capital Asset Pricing Model. We
have proven that both models are feasible with some
innovative adjustments made to them.

• Thesis Type: Thesis
• Deposit Date: Oct 3, 2012
• Award Date: Jan 1, 2011