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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Asset Allocation vs Risk Premia Allocation
Organization Unit
  • David Bondi
  • Thorsten Hens
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 68
Date July 2019
Zusammenfassung Over the last decade, we have observed in the industry a shift from Asset Allocation to Risk Premia Allocation. The goal of this thesis is to show empirically whether this enhances returns or decreases risks and to give an intuition for those results. In this paper, we explain that both strategies exhibit interesting properties that fulfil different in-vestment expectations. We show that a tactical asset allocation (TAA) portfolio is more suitable for a long-term investor whereas a composite risk premia portfolio best fits a short-term investment horizon. We give the intuition behind the following risk premia: Value, Momentum, Carry and Low Beta that have already produced long-term positive average returns across markets and asset classes and have been backed with strong economic intuition. We explain how they can be harvested through different asset classes and what data to use. Furthermore, we show that when they are combined into global risk premia portfolios significant diversification benefits arise. When we push further the process and combine the global risk premia portfolios into a composite risk premia portfolio, the diversification phenomena is even greater. At that time, we observe a relatively low exposure to traditional markets and their drawdowns. Our tactical asset allocation is based on economically motivated indicators from four scientifically valid areas: valuation, trend, risk and macroeconomics. This strategy yields a better Sharpe ratio than a traditional portfolio without any asset timing. Despite delivering larger returns, it displays greater risk measures and more exposure to traditional markets. Moreover, while we show theoretically that the returns of the two strategies compared should be equal, we find empirical evidence that refute the theory. One of the most plausible explanations we give is the reduction in dimensionality the risk premia methodology causes when aggregating a large number of securities into smaller groups based on a common criteria. Still today, it is difficult to know whether risk premia are caused by rational or irrational factors. We present the reader both views.
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