Not logged in.
Quick Search - Contribution
|Title||Asset Allocation vs Risk Premia Allocation|
|Institution||University of Zurich|
|Faculty||Faculty of Business, Economics and Informatics|
|Number of Pages||68|
|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.|