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Strategic Asset AllocationPortfolio Choice for Long-Term Investors$
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John Y. Campbell and Luis M. Viceira

Print publication date: 2002

Print ISBN-13: 9780198296942

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198296940.001.0001

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Introduction

Introduction

Chapter:
(p.1) 1 Introduction
Source:
Strategic Asset Allocation
Author(s):

John Y. Campbell (Contributor Webpage)

Luis M. Viceira (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0198296940.003.0001

The mean‐variance paradigm has the strong implication that all investors should hold risky assets in the same proportion. Financial planners typically advise conservative investors to tilt their risky portfolios towards bonds and away from stocks; this has been called the “asset allocation puzzle” since it contradicts standard mean‐variance analysis. Financial planners also argue that long‐term investors can afford greater exposure to stock market risk. This book will show how financial planners’ advice can be justified by an inter‐temporal model of a rational investor. The model ignores some important real‐world issues, including diversification of individual stocks, transactions costs, taxation, and the biases identified by research in behavioural finance.

Keywords:   behavioural finance, diversification, equity premium, financial planning, inter‐temporal model, mean‐variance analysis, risk aversion, taxes, transaction costs

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