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A Framework for Examining Asset Allocation Alpha

Jason C. Hsu and Omid Shakernia
The Journal of Beta Investment Strategies Spring 2013, 3 (4) 64-72; DOI: https://doi.org/10.3905/jii.2013.3.4.064
Jason C. Hsu
is CIO at Research Affiliates, LLC, and adjunct professor of finance at UCLA Anderson School of Management in Newport Beach, CA.
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  • For correspondence: hsu@rallc.com
Omid Shakernia
is a vice president at Research Affiliates, LLC in Newport Beach, CA.
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  • For correspondence: shakernia@rallc.com
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Abstract

Despite the large body of literature on the importance of asset allocation as a primary determinant of portfolio performance, the definition of asset allocation “alpha” remains a poorly defined concept. In this article, we show that a portfolio’s total alpha can be decomposed into alpha from asset allocation and manager selection. The asset allocation alpha can then be further attributed to value-add from 1) taking additional risk exposure relative to the policy portfolio, 2) exploiting the relative value differential between assets with similar risk exposures, and 3) timing the cyclicality in risk premia.

TOPICS: Portfolio construction, manager selection, VAR and use of alternative risk measures of trading risk, simulations

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The Journal of Index Investing: 3 (4)
The Journal of Beta Investment Strategies
Vol. 3, Issue 4
Spring 2013
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A Framework for Examining Asset Allocation Alpha
Jason C. Hsu, Omid Shakernia
The Journal of Beta Investment Strategies Feb 2013, 3 (4) 64-72; DOI: 10.3905/jii.2013.3.4.064

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A Framework for Examining Asset Allocation Alpha
Jason C. Hsu, Omid Shakernia
The Journal of Beta Investment Strategies Feb 2013, 3 (4) 64-72; DOI: 10.3905/jii.2013.3.4.064
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  • Article
    • Abstract
    • TOTAL PORTFOLIO ALPHA = ASSET ALLOCATION ALPHA + MANAGER SELECTION ALPHA
    • A RISK-BASED FRAMEWORK FOR ANALYZING ASSET ALLOCATION
    • THE THREE SOURCES OF ASSET ALLOCATION ALPHA
    • A NUMERICAL EXAMPLE
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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