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The Role of Asset Allocation in Portfolio Management Essay

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Updated: May 9th, 2022

The article by Scott Lummer and Mark Riepe attests to the fundamental role that asset allocation plays in the selection decision process and portfolio management. This article entails implicit as well as explicit dimensions of asset allocation decisions. According to recent research, an average of 91.5 % of the existing discrepancy of portfolios decisions as regards asset allocation. Consequently, the financial spotlight has contemporarily included even the asset allocation decision. Modern institutions consider asset allocation as one of the rigorous enterprises. It entails the use of critical tools that are necessary for the transformation of the whole process. The article pays special attention to the Mean-Variance Optimization (MVO), which is an arithmetical process that fundamentally helps in the calculation of the asset or security class weights. According to Section 1, the class weights provide the portfolio with the maximum expected return for a particular risk level. Conversely, the mean-variance optimization also focuses on the portfolio with maximum risk for a given expected return. Appropriate inputs are indispensable for the process of conducting Mean-Variance Optimization with the probable standard deviation top of the priority list. Elements of correlation also play a part as far as MVO is concerned.

During its inception, the MVO primarily applied to entity stocks with a few factors also put into consideration. In the modern-day world, however, the technique has found new applications on an asset level, usually with increases in frequency. The article recommends the suitability of the trend for two primary reasons. The first reason pertains to the inputs that the Markowitz model required. Apparently, these inputs are relatively intricate to approximate particularly for those individual securities as opposed to complications that come along with an assessment of the classes of asset. Secondly, the assortment of asset classes for investors has emerged to be superior contrary to the wider expectation particularly considering the growth of goodwill among investors in America to consider investing in the worldwide arena. Interestingly, all institutional investors and other forms of investors deserve a fair chance to utilize the benefits that emanate from this kind of development. Similarly, customers have only benefited from the stock assortment that their retail brokerage has habitually provided for them. The increases in the rate of recurrence have triggered a possible larger scale of reflexive security selection with a lot of preference accorded to the recommended asset share to the potential investors. The retail brokerage houses have employed optimization as the major technique that would help create allocations. These allocations would provide the individual accounts with a substantial return as per the mounting expectations and less risk.

The second section has a special focus on the Dynamic nature of Asset allocation. In essence, dynamic asset allocation is a concept whose primary concern is fielding strategies that would frequently alter the allocation of the portfolio in response to the constant changes in conditions of the industry. The article considers the trendiest locale of application of the range of devices as the portfolio insurance. From the general perspective, portfolio insurance entails any strategy that would attempt to eliminate the downside risk experienced by the portfolio. Section three’s tactical asset allocation is a process that involves divergence from the strategic asset allocation particularly when there are deviations in short-term forecasts of the investors from the long-term forecasts that are essential for the process of formulating the strategic allocation. Section 4 is mainly concerned with the future of asset allocation.

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IvyPanda. 2022. "The Role of Asset Allocation in Portfolio Management." May 9, 2022. https://ivypanda.com/essays/the-role-of-asset-allocation-in-portfolio-management/.

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IvyPanda. (2022) 'The Role of Asset Allocation in Portfolio Management'. 9 May.

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