Abstract
Asset allocation is at the heart of every portfolio construction process and crucial to its success. Though as diverse as they are innovative, the approaches used to pinpoint the optimal mix of assets mostly have common roots. In the following paper, we address this commonality in depth. First, we outline the portfolio construction process and highlight empirically the importance of asset allocation with respect to a portfolio's return. Second, the evolution of portfolio theory is put into a historical perspective. Third, we present a unified optimization framework for asset allocation and show that most well-known asset allocation techniques fit exactly in that framework. Finally, an illustrative example brings to light the similarities and differences of three prevalent approaches and highlights implications for practitioners.
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