Abstract
Executive Summary. This article examines the portfolio allocation decision within an asset/liability framework. Here portfolio weights are chosen not just by an asset’s return and variance but also by its correlation with pension liabilities. This results in assets that are highly correlated with pension liabilities being weighted higher in the portfolio. Typical mean-variance models estimate allocations to both public and private real estate as high as 40%. In the asset/liability model, allocations to both private and public real estate are lower and closer to what is actually observed in pension plan portfolios.
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