Mean-variance investing is all about diversification. Diversification considers assets holistically and exploits the interaction of assets with each other, rather than viewing assets in isolation. Holding a diversified portfolio allows investors to increase expected returns while reducing risks....

After taking into account biases induced by infrequent trading and selection, it is unlikely that illiquid asset classes have higher risk-adjusted returns than traditional liquid stock and bond markets. On the other hand, there are significant illiquidity premiums within asset classes. Portfolio...

This paper argues that in the presence of liquidation costs, portfolio diversification by financial institutions may be socially inefficient. We propose a stylized model in which individual banks have an incentive to hold diversified portfolios. Yet, at the same time, diversification may...

We propose a simple and dynamic approach to hedge currency risk which can directly be applied by international investors in diverse asset classes. Other than current mean-variance approaches it is robust to overfitting and can thus better anticipate optimal currency hedging for global equity,...

We develop a dynamic portfolio-choice model with illiquid alternative assets to analyze conditions under which the “Endowment Model,” used by some large institutional investors such as university endowments, does or does not work. The alternative asset has a lock-up, but can be voluntarily...

Shortfall aversion reflects the higher utility loss of spending cuts from a reference than the utility gain from similar spending increases. Inspired by Prospect Theory's loss aversion and the peak-end rule, this paper posits a model of utility from spending scaled by past peak-spending. In...

We evaluate popular measures of hedge fund tail risk such as maximum drawdown (MDD) and worst one-period loss, and prove theoretically that realized tail risk is a downward-biased estimator of true tail risk. The bias can be almost 100% using a reasonable calibration. That is, true tail risk can...

About once a quarter. We compute optimal tactical asset allocation (TAA) policies over equities and bonds when both asset returns are predictable. By varying how often the weights are reset, we estimate the benefits and costs of different frequencies of TAA decisions. Tactical tilts taking...

Factor investing asks: how well can a particular investor weather hard times relative to the average investor? Answering helps her reap long-run factor premiums by embracing risks that lose money during bad times, but make up for it the rest of the time with attractive rewards. When factor...

American university and college endowments now hold close to one-third of their portfolios in private equity and hedge funds. We estimate the implied beliefs of endowments about alternative assets' returns relative to equities and bonds. At the end of 2012, the typical endowment believes that...