Capturing Average Returns With Asset Allocation, Part II

In a recent post I reviewed how asset allocation is a reliable tool for earning average to above-average returns (with average or below-average risk) for a given opportunity set. Let’s extend the concept with a real-world test of three more market slices: US fixed income, US equity sectors and US equity risk factors.

First up is fixed income, based on this set of bond ETFs to proxy a wide sample of US fixed income. For the test period we’ll look at the trailing five-year window. Once again, the value of allocating assets (using equal weights that are rebalanced every Dec. 31) is clear. In particular, notice that the equal-weighted mix is relatively stable and delivers roughly average results.    

For equity sector ETFs, I used this fund set. Here, too, we see a familiar outcome: average results.

Next, here’s the equity factor test, based on a broad set of representative ETFs.

The common theme: asset allocation across a representative set of funds within a given markets space delivers a dependable strategy for earning average-to-above-average performance while keeping risk under control, typically at an average level if not below average.

The relatively consistent return and risk-management outcomes of holding everything and equal weighting (or cap weighting) lays a foundation for enhancing the results further by adding, say, a momentum overlay for adjusting weights tactically with an eye on juicing return a bit and/or lowering risk.

In an upcoming post I’ll look at some of the possibilities.


Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return

By James Picerno


One thought on “Capturing Average Returns With Asset Allocation, Part II

  1. Pingback: The Power of Asset Allocation to Capture Average Returns - TradingGods.net

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.