Optimal Asset Allocation Strategies for International Equity Portfolios


Empirische Kapitalmarktforschung, Risk & Optimization

Journal of International Financial Markets, Institutions & Money


  • Asset allocation
  • Portfolio optimization
  • Sector indices vs. Country indices


Wolff, Dr. Dominik Taushanov, Georgi Bessler, Wolfgang


Although most academic studies conclude that mutual funds cannot outperform a passive investment strategy in the long run, there is some recent empirical evidence that a persistent outperformance can be achieved in an out-of-sample framework when using sophisticated optimization techniques. These empirical findings are for equity-bond-commodity-portfolios, international equity-bond portfolios and US-industry portfolios. The latter can even be further improved when return predictions are included. Given these empirical findings, we analyze in this study whether an industry-based or a country-based optimization model performs best. We employ a variety of optimization- and weighting-techniques to compare the country- and the sector-based allocation strategies. These include naive ‘equally weighted’ (1/N) portfolio, the two risk-based asset allocation rules ‘risk-parity’ (RP) and minimum-variance (MinVar) as well as three portfolio optimization approaches mean-variance (MV), Bayes-Stein (BS) and the Black-Litterman (BL) model. We also include simple return prediction models. To determine whether one approach is persistently superior to the other approach, we analyze time varying effects based on the state of the economy, i.e. expansionary or recessionary periods. Moreover, we investigate investment style or investor clientele ef-fects, the full period and different sub-periods, equity-only and equity-bond portfolios as well as aggressive and conservative investments styles. Summarizing of all analyzed cases, we find strong evidence for the fact that in the long run the sector-oriented asset allocation provided a higher performance than the country-allocation. In almost all the observed cases, the sector-based allocation achieved higher Sharpe ratios than the country-based allocation.

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