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Book part
Publication date: 11 August 2016

Karoll Gómez Portilla

This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury…

Abstract

This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities. Based on a nonparametric estimation technique and comparing the optimal allocation decisions of mean-variance and CRRA investor, when investment opportunities are time varying, I present evidence that liquidity risk premium is a significant risk-factor in a portfolio allocation context. In fact, I find that a conditional allocation strategy translates into improved in-sample and out-of-sample asset allocation and performance. The analysis of the portfolio allocation to U.S. government bonds is particularly important for central banks, specially in developing countries, given the fact that, collectively they have accumulate a large holdings of U.S. securities over the last 15 years.

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The Spread of Financial Sophistication through Emerging Markets Worldwide
Type: Book
ISBN: 978-1-78635-155-5

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Book part
Publication date: 20 October 2015

Raquel Meyer Alexander, LeAnn Luna and Steven L. Gill

Section 529 college savings plans are tax-favored investment vehicles, which saw tremendous growth after the Economic Growth and Tax Relief Reconciliation Act of 2001…

Abstract

Section 529 college savings plans are tax-favored investment vehicles, which saw tremendous growth after the Economic Growth and Tax Relief Reconciliation Act of 2001 expanded 529 plan benefits to include tax-free distributions for qualified higher education expenses. However, regulators, the press, and fund advisors criticized the Section 529 college savings plan industry for inadequate and nonuniform disclosures of investor information, such as historical returns, fees, taxes, and underlying investments. We investigate consumers’ investment choices after a disclosure regime change in 2003 and find that after enhanced disclosures became widely available, investors selected fewer plans offered exclusively through brokers, increasingly chose portfolios based on past investment performance, but remained unresponsive to state tax benefit disclosures. We also analyze the plans’ performance and find evidence that 529 investors are constrained to invest in portfolios with high, return-eroding fees. Nearly 20 percent of the portfolios have a statistically significant negative alpha, the measure of risk-adjusted excess return, while less than 1 percent have a statistically significant positive alpha.

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Advances in Taxation
Type: Book
ISBN: 978-1-78560-277-1

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Article
Publication date: 13 February 2007

A. Olaleye, B.T. Aluko and C.A. Ajayi

The purpose of this paper is to examine the factors that have influenced the use of implicit (naïve) techniques in property portfolio diversification evaluation in the…

Abstract

Purpose

The purpose of this paper is to examine the factors that have influenced the use of implicit (naïve) techniques in property portfolio diversification evaluation in the Nigeria property market. This is necessitated by the need to look at the ways by which the property portfolio diversification evaluation practice in the market could be made to improve and adjust to ever changing global trends in this area.

Design/methodology/approach

The authors of this paper administered questionnaires, backed up with interviews, on 28 institutional property investors and 128 real estate practitioners in three locations (commercial nerve centres) of the country, namely, Lagos, Abuja and Port‐Harcourt metropolitan areas. Data were analysed with the use of frequency distribution, mean and standard deviation measures, relative importance index and Pearson Chi‐Square test.

Findings

The results of the study in this paper revealed, among others, that lack of time series data and the small size of many of the investors' portfolios in Nigeria encouraged the use of implicit analysis in their property portfolio evaluation techniques. The study also showed that investors and practitioners detest complex calculations and were using traditional evaluation techniques because they considered the methods as needing no pre‐requisite knowledge before they could be used.

Practical implications

The study in the paper concluded that there is the need for a restructuring of the Nigerian real estate education and portfolio evaluation practice and the use of a micro‐real estate specific data derived from local market information to develop property performance indices towards building up functional real estate indices at the regional and national levels.

Originality/value

This paper is a pioneering attempt at establishing the factors that influenced the use of implicit techniques in property portfolio diversification evaluation in emerging property markets like Nigeria.

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Journal of Property Investment & Finance, vol. 25 no. 1
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 26 August 2014

Mourad Mroua and Fathi Abid

Since equity markets have a dynamic nature, the purpose of this paper is to investigate the performance of a revision procedure for domestic and international portfolios

Abstract

Purpose

Since equity markets have a dynamic nature, the purpose of this paper is to investigate the performance of a revision procedure for domestic and international portfolios, and provides an empirical selection strategy for optimal diversification from an American investor's point of view. This paper considers the impact of estimation errors on the optimization processes in financial portfolios.

Design/methodology/approach

This paper introduces the concept of portfolio resampling using Monte Carlo method. Statistical inferences methodology is applied to construct the sample acceptance regions and confidence regions for the resampled portfolios needing revision. Tracking error variance minimization (TEVM) problem is used to define the tracking error efficient frontiers (TEEF) referring to Roll (1992). This paper employs a computation method of the periodical after revision return performance level of the dynamic diversification strategies considering the transaction cost.

Findings

The main finding is that the global portfolio diversification benefits exist for the domestic investors, in both the mean-variance and tracking error analysis. Through TEEF, the dynamic analysis indicates that domestic dynamic diversification outperforms international major and emerging diversification strategies. Portfolio revision appears to be of no systematic benefit. Depending on the revision of the weights of the assets in the portfolio and the transaction costs, the revision policy can negatively affect the performance of an investment strategy. Considering the transaction costs of portfolios revision, the results of the return performance computation suggest the dominance of the global and the international emerging markets diversification over all other strategies. Finally, an assessment between the return and the cost of the portfolios revision strategy is necessary.

Originality/value

The innovation of this paper is to introduce a new concept of the dynamic portfolio management by considering the transaction costs. This paper investigates the performance of a revision procedure for domestic and international portfolios and provides an empirical selection strategy for optimal diversification. The originality of the idea consists on the application of a new statistical inferences methodology to define portfolios needing revision and the use of the TEVM algorithm to define the tracking error dynamic efficient frontiers.

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International Journal of Managerial Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 3 April 2017

Mourad Mroua, Fathi Abid and Wing Keung Wong

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights…

Abstract

Purpose

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights and on financial investment decision. Second, the authors advance a comparative analysis between various domestic and international diversification strategies to define a stochastic optimal choice. Third, the authors propose a new methodology combining the re-sampling method, stochastic optimization algorithm, and nonparametric stochastic dominance (SD) approach to analyze a stochastic optimal portfolio choice for risk-averse American investors who care about benefits of domestic diversification relative to international diversification. The authors propose a new portfolio optimization model involving SD constraints on the portfolio return rate. The authors define a portfolio with return dominating the benchmark portfolio return in the second-order stochastic dominance (SSD) and having maximum expected return. The authors combine re-sampling procedure and stochastic optimization to establish more flexibility in the investment decision rule.

Design/methodology/approach

The authors apply the re-sampling procedure to consider the sampling error in the optimization process. The authors try to resolve the problem of the stochastic optimal investment strategy choice using the nonparametric SD test by Linton et al. (2005) based on sub-sampling simulated p values. The authors apply the stochastic portfolio optimization algorithm with SSD constraints to define optimal diversified portfolios beating benchmark indices.

Findings

First, the authors find that reducing sampling error increases the dominance relationships between different portfolios, which, in turn, alters portfolio investment decisions. Though international diversification is preferred in some cases, the study’s results show that for risk-averse US investors, in general, there is no difference between the diversification strategies; this implies that there is no increase in the expected utility of international diversification for the period before and after the 2007-2008 financial crisis. Nevertheless, the authors find that stochastic diversification in domestic, global, and Europe, Australasia, and Far East markets delivers better risk returns for the US risk averters during the crisis period.

Originality/value

The originality of the idea in this paper is to introduce a new methodology combining the concept of portfolio re-sampling, stochastic portfolio optimization with SSD constraints, and the nonparametric SD test by Linton et al. (2005) based on subsampling simulated p values to analyze the impact of sampling errors on optimal portfolio returns and to investigate the problem of stochastic optimal choice between international and domestic diversification strategies. The authors try to prove more coherence in the portfolio choice with the stochastically and the uncertainty characters of the paper.

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American Journal of Business, vol. 32 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 21 August 2017

Nurul Shahnaz Mahdzan, Rozaimah Zainudin, Rosmawani Che Hashim and Noor Adwa Sulaiman

This study aims to investigate the association between Muslim individuals’ portfolio allocation choice and Islamic religiosity (levels and dimensions), controlling for…

Abstract

Purpose

This study aims to investigate the association between Muslim individuals’ portfolio allocation choice and Islamic religiosity (levels and dimensions), controlling for risk tolerance and sociodemographic factors.

Design/methodology/approach

The study uses primary data collected via survey questionnaires from a sample of 751 Muslim working individuals in Kuala Lumpur, Malaysia. Owing to the ordinal nature of the dependent variable, which reflects the levels of proportions of risky assets in portfolios, the data were analyzed using an ordered probit regression model.

Findings

The findings reveal that Islamic religiosity levels in general were insignificantly related to portfolio allocation, but that two dimensions of religiosity (virtue and obligation) significantly impact the allocations of risky assets in the portfolio. The higher the level of virtue, the lower the propensity to allocate risky assets into the portfolio. On the contrary, the higher the level of obligation, the higher the propensity to allocate risky assets in the portfolio. Meanwhile, individuals with higher risk tolerance, income and education levels show greater propensity to allocate risky assets in the portfolio.

Research limitations/implications

The sample is restricted to Muslims in Kuala Lumpur; hence, the findings are not easily generalized to Muslim investors in general. Findings may differ between Muslims across the world, so future research needs to expand from a country specific to an international analysis. In addition, future studies could include other determinants of portfolio allocation, such as financial literacy.

Practical implications

The findings of this study may assist financial planners and policymakers to better understand the drivers of portfolio allocation among their Muslim clients.

Originality/value

While other studies have tended to focus on the impact of religiosity on the holdings of specific financial assets, such as Islamic bank accounts or Takaful, the present study explores the effect of Islamic religiosity dimensions on the allocations of risky assets in the portfolio. The study also develops an ordinal measure of portfolio allocation and makes a methodological contribution by using an ordered probit regression analysis.

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International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 2 March 2012

Jacques A. Schnabel

The purpose of this paper is to develop a model of international capital market equilibrium where investors exhibit home‐country bias due to their desire to hedge real consumption.

Abstract

Purpose

The purpose of this paper is to develop a model of international capital market equilibrium where investors exhibit home‐country bias due to their desire to hedge real consumption.

Design/methodology/approach

This paper posits a two‐stage process of portfolio choice for the representative investor of a country. In the first step, the investor's benchmark portfolio is determined, whereas in the second step, his optimal portfolio is chosen. The latter portfolio maximizes the expected portfolio rate of return minus the risk tolerance weighted variance of tracking error. The market equilibrium implications of the portfolio optimality conditions are determine via aggregation across all investors and countries.

Findings

A revised security market line is derived that differs from the traditional security market line in terms of vertical intercept, slope, and beta coefficient. It is demonstrated that the derived model may be interpreted as a multi‐country generalization of the Chen‐Boness extension of the capital asset pricing model under uncertain inflation.

Originality/value

This paper presents an innovative application of Roll's tracking portfolio paradigm. Another novel feature is the derivation of the international capital market equilibrium implications of such portfolio choice behaviour.

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Article
Publication date: 1 March 1980

Elie Appelbaum and Eliakim Katz

In this paper we consider the effects of certain capital market imperfections on portfolio choice problems. We show that as a result of these imperfections, the…

Abstract

In this paper we consider the effects of certain capital market imperfections on portfolio choice problems. We show that as a result of these imperfections, the distribution functions of rates of return may depend on portfolio allocation, thus leading to non‐convexities and consequently to patterns of specialisation rather than diversification.

Details

Journal of Economic Studies, vol. 7 no. 3
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 19 July 2011

Yana Damoiseau, William C. Black and Randle D. Raggio

This paper seeks to address the following question: What causes firms to choose brand creation vs brand acquisition for brand portfolio expansion?

Abstract

Purpose

This paper seeks to address the following question: What causes firms to choose brand creation vs brand acquisition for brand portfolio expansion?

Design/methodology/approach

A multilevel interdisciplinary conceptual model is developed with nine factors at three levels of influence: the market, firm, and brand portfolio. Using 125 brand acquisitions and creations for 22 firms between 2001 and 2007, the model is tested using logistic regression to determine which factors significantly influence brand portfolio expansion strategy and whether they encourage acquisition or creation.

Findings

Significant factors were found at the market and firm levels, with competitive intensity of the market having the strongest effect, followed by the firm's financial leverage, market concentration, and market growth.

Practical implications

Contrary to prior expectations, external factors at the market and firm levels have an impact on choice of acquisition vs creation. However, internal firm factors may serve as moderators of strategy effectiveness.

Originality/value

This is the first study to empirically examine factors affecting the brand portfolio expansion strategy via brand creation versus brand acquisition across a variety of industries. From a methodological standpoint, one of the more serious and persistent problems facing prior brand research is the lack of brand‐level data, but this paper's approach overcomes this limitation by using media expenditures in the AdSpender database to represent brands within a category/market.

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Article
Publication date: 21 April 2010

Alistair Byrne, David Blake and Graham Mannion

We examine the contribution and investment decisions made by members of a large UK‐based DC pension plan. We find that many employees appear to be relatively financially…

Abstract

We examine the contribution and investment decisions made by members of a large UK‐based DC pension plan. We find that many employees appear to be relatively financially sophisticated and follow approaches consistent with economic and financial theory in terms of savings rates and investment strategies. However, there are also many less sophisticated employees who stick with plan default arrangements and/or follow simple rules of thumb in saving and investing. The challenge for corporate sponsors of pension plans is in designing arrangements and communication strategies that reduce the chances of these less sophisticated plan members making mistakes – in the sense of systematic deviations from optimal behaviour.

Details

Review of Behavioural Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1940-5979

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