Bayesian Asset Allocation and U.S. Domestic Bias

Bayesian Asset Allocation and U.S. Domestic Bias

U.S. investors hold much less international stock than is optimal according to mean-variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to international asset allocation. In comparison with mean-variance analysis, Bayes...

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Veröffentlicht in:Financial Analysts Journal. - The Financial Analysts Federation, 1960. - 59(2003), 6, Seite 54-65
Format: Online-Aufsatz
Sprache:English
Veröffentlicht: 2003
Zugriff auf das übergeordnete Werk:Financial Analysts Journal
Schlagworte:Portfolio Management: asset allocation Investment Theory: CAPM, APT, and other pricing theories Economics Business Religion Mathematics
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520 |a U.S. investors hold much less international stock than is optimal according to mean-variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to international asset allocation. In comparison with mean-variance analysis, Bayesian approaches use different techniques for obtaining the set of expected returns by shrinking the sample means toward a reference point that is inferred from economic theory. Applying the Bayesian approaches to the field of international diversification, we found that a substantial home bias can be explained when a U.S. investor has a strong belief in the global mean-variance efficiency of the U.S. market portfolio, and in this article, we show how to quantify the strength of this belief. We also found that one of the Bayesian approaches leads to the same implications for asset allocation as the mean-variance/tracking-error criterion. In both cases, the optimal portfolio is a combination of the U.S. market portfolio and the mean-variance-efficient portfolio with the highest Sharpe ratio. 
540 |a Copyright 2003 Association for Investment Management and Research 
650 4 |a Portfolio Management: asset allocation 
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