Abstract
The questions of how much risk to take on, and when, are ones that investment managers are continually negotiating as they chase greater returns. In <b><i> Liquidity-Driven Dynamic Asset Allocation</i></b>, which was published in the Spring 2013 issue of <b><i>The Journal of Portfolio Management</i></b>, the authors investigate firm-level liquidity risk and aggregate market risk and their relationship to each other. They show how investors can use aggregated market liquidity as a signal to time the overall market. This Practical Applications report is based on an interview with Co-Author <b>James X. Xiong</b>, Head of Quantitative Research at <b>Morningstar Investment Management</b>. Xiong describes the well-tested methodology the article introduces. He suggests that investors can use the methodology, known as the liquidity measure, to rebalance portfolios to enhance performance—over time, throughout liquidity cycles and between high- and low-liquidity-premium environments. Xiong’s co-authors are: <b>Rodney N. Sullivan</b>, Head of Publications at the <b>CFA Institute</b>, and <b>Peng Wang</b>, Investment Associate at the <b>University of Virginia Investment Company</b>. The bottom line: Use liquidity signals to construct asset allocation models. <b>TOPICS:</b>Portfolio construction, factor-based models, in markets
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