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This study attempts to conduct a comparative analysis between dynamic and static asset allocation to achieve the long-term target return on asset liability management (ALM). This…
Abstract
This study attempts to conduct a comparative analysis between dynamic and static asset allocation to achieve the long-term target return on asset liability management (ALM). This study conducts asset allocation using the ex ante expected rate of return through the outlook of future economic indicators because past economic indicators or realized rate of returns which are used as input data for expected rate of returns in the “building block” method, most adopted by domestic pension funds, does not fully reflect the future economic situation. Vector autoregression is used to estimate and forecast long-term interest rates. Furthermore, it is applied to gross domestic product and consumer price index estimation because it is widely used in financial time series data. Based on asset allocation simulations, this study derived the following insights: first, economic indicator filtering and upper-lower bound computation is needed to reduce the expected return volatility. Second, to reach the ALM goal, more stocks should be allocated than low-yielding assets. Finally, dynamic asset allocation which has been mirroring economic changes actively has a higher annual yield and risk-adjusted return than static asset allocation.
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Sulaimon Olanrewaju Adebiyi, Oludayo Olatosimi Ogunbiyi and Bilqis Bolanle Amole
The purpose of this paper is to implement a genetic algorithmic geared toward building an optimized investment portfolio exploring data set from stocks of firms listed on the…
Abstract
Purpose
The purpose of this paper is to implement a genetic algorithmic geared toward building an optimized investment portfolio exploring data set from stocks of firms listed on the Nigerian exchange market. To provide a research-driven guide toward portfolio business assessment and implementation for optimal risk-return.
Design/methodology/approach
The approach was to formulate the portfolio selection problem as a mathematical programming problem to optimize returns of portfolio; calculated by a Sharpe ratio. A genetic algorithm (GA) is then applied to solve the formulated model. The GA lead to an optimized portfolio, suggesting an effective asset allocation to achieve the optimized returns.
Findings
The approach enables an investor to take a calculated risk in selecting and investing in an investment portfolio best minimizes the risks and maximizes returns. The investor can make a sound investment decision based on expected returns suggested from the optimal portfolio.
Research limitations/implications
The data used for the GA model building and implementation GA was limited to stock market prices. Thus, portfolio investment that which to combines another capital market instrument was used.
Practical implications
Investment managers can implement this GA method to solve the usual bottleneck in selecting or determining which stock to advise potential investors to invest in, and also advise on which capital sharing ratio to reduce risk and attain optimal portfolio-mix targeted at achieving an optimal return on investment.
Originality/value
The value proposition of this paper is due to its exhaustiveness in considering the very important measures in the selection of an optimal portfolio such as risk, liquidity ratio, returns, diversification and asset allocation.
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Luc Chavalle and Luis Chavez-Bedoya
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with…
Abstract
Purpose
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with respect to the ones applied in the USA, and over a few dimensions.
Design/methodology/approach
The paper opted for an empirical study analyzing the cost of rebalancing portfolios over a set period and dimensions. Stocks have been carefully selected using Bloomberg terminals, and portfolio designed then rebalanced using VBA programming. Over a few dimensions as type and number of stocks, holding period and trading strategy, the behavior of these different transaction costs has been compared. The analysis has been done for four different portfolios.
Findings
The paper provides empirical insights about how a retail investor actively trading in Peru can pay up to 14 times more in transaction costs than trading the same portfolio in the USA. These comparatively high transaction costs prevent retail investors to trade in the Peruvian stock market while fueling illiquidity to this market.
Research limitations/implications
The paper deals with a limited amount of Peruvian stocks. Researchers are encouraged to test the proposition further, including other dimensions.
Practical implications
The paper includes implications for any retail investor that wants to invest in Peruvian stocks, giving an insight about how expensive it is to actively rebalance a portfolio in Peru.
Originality/value
This paper fulfils an identified need to study how much it costs to actively invest on the stock market in Peru.
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A. Can Inci and Rachel Lagasse
This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period covering not…
Abstract
Purpose
This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period covering not only the large value increases but also the dramatic declines during the beginning of 2018, the purpose of this paper is to provide a more complete analysis of the dynamic nature of cryptocurrencies as individual investment opportunities, and as components of optimal portfolios.
Design/methodology/approach
The mean-variance optimization technique of Merton (1990) is applied to develop the risk and return characteristics of the efficient portfolios, along with the optimal weights of the asset class components in the portfolios.
Findings
The authors provide evidence that as a single investment, the best cryptocurrency is Ripple, followed by Bitcoin and Litecoin. Furthermore, cryptocurrencies have a useful role in the optimal portfolio construction and in investments, in addition to their original purposes for which they were created. Bitcoin is the best cryptocurrency enhancing the characteristics of the optimal portfolio. Ripple and Litecoin follow in terms of their usefulness in an optimal portfolio as single cryptocurrencies. Including all these cryptocurrencies in a portfolio generates the best (most optimal) results. Contributions of the cryptocurrencies to the optimal portfolio evolve over time. Therefore, the results and conclusions of this study have no guarantee for continuation in an exact manner in the future. However, the increasing popularity and the unique characteristics of cryptocurrencies will assist their future presence in investment portfolios.
Originality/value
This is one of the first studies that examine the role of popular cryptocurrencies in enhancing a portfolio composed of traditional asset classes. The sample period is the largest that has been used in this strand of the literature, and allows to compare optimal portfolios in early/recent subsamples, and during the pre-/post-cryptocurrency crisis periods.
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Ximena Alejandra Flechas Chaparro, Leonardo Augusto de Vasconcelos Gomes and Paulo Tromboni de Souza Nascimento
The purpose of this paper is to identify how project portfolio selection (PPS) methods have evolved and which approaches are more suitable for radical innovation projects. This…
Abstract
Purpose
The purpose of this paper is to identify how project portfolio selection (PPS) methods have evolved and which approaches are more suitable for radical innovation projects. This paper addressed the following research question: how have the selection approaches evolved to better fit within radical innovation conditions? The current literature offers a number of selection approaches with different and, in some cases, conflicting nature. Therefore, there is a lack of understanding regarding when and how to use these approaches in order to select a specific type of innovation projects (from incremental to more radical ones).
Design/methodology/approach
Given the nature of the research question, the authors perform a systematic literature review method and analyze 48 portfolio selection approaches. The authors then classified and characterized these articles in order to identify techniques, tools, required data and types of examined projects, among other aspects.
Findings
The authors identify four key features related to the selection of radical innovation projects: dynamism, interdependency management, uncertainty treatment and required input data. Based on the content analysis, the authors identified that approaches based on different sources and nature of data are more appropriated for uncertain conditions, such as behavioral methods, information gap theory, real options and integrated approaches.
Originality/value
The research provides a comprehensive framework about PPS methods and how they have been evolving over time. This portfolio selection framework considers the particular aspects of incremental and radical innovation projects. The authors hope that the framework contributes to reinvigorating the literature on selection approaches for innovation projects.
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