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Dynamic Strategies For Asset Allocation
Dynamic Strategies For Asset Allocation
Allocation
slope=0.6
40
slope=1 (100%
in stocks)
100% in bills (slope=0)
slope=1
60
60 slope=0.6
Stocks 60 54 56.4
Bills 40 40 37.6
total assets 100 94 94
Due to “change”
stock/tot. asset =54/94=57.4%
After rebalance (i.e. buy more $2.4 stocks), i.e.,
stock/total asset =56.4/94=60%
The general rule of constant-mix
strategy is to buy stocks when their
prices are falling and to sell stocks
when they are rising.
constant-mix
40
Value of stocks
When will Constant-mix outperform Buy-
and-Hold Strategy?
• Consider a case in which stocks fall from 100 to 90,
the recover to 100. The market is flat, but it
oscillates back and forth.
• Buy-and-hold strategy - same
• Constant-mix strategy will do better than the buy-
and-hold because it buys more stocks as they falls.
When shares later increases in prices, the more share
purchased will enhance the return for the Constant-
Mix Strategy
• Other cases include: large volatility and price
reversals.
Constant-Proportion Strategies
50 slope=m=2
75=floor 100
Value of assets
Dollars in stocks= 2(100-75)
=$50
value of assets
25/75 buy-and-hold
50/50 buy-and-hold