This course examines advanced analytical methods and topics in investments from a macro asset allocation perspective. We adopt the viewpoint of a long-term institutional investor--such as a university endowment, pension fund, or family office--seeking to dynamically allocate capital across broad asset classes, including equities, corporate and sovereign bonds, and private equity. Asset allocation focuses on the allocation across asset classes rather than security selection within them.
Developing an asset allocation strategy requires a deep understanding of the dynamics of risk and return across these markets. We will apply empirical methods, including return forecasting regressions, shrinkage techniques, and techniques for out-of-sample evaluation, to form and assess expectations about risk and return. We will also examine how information from investor surveys and fund flows can be used to gauge investor sentiment and to enhance these forecasts.
To translate these empirical inputs into portfolio decisions, we will extend the mean-variance framework introduced in your introductory investments course to analyze multi-period portfolio choice over long horizons. We will also evaluate practical rule-of-thumb approaches such as risk parity and naive diversification, and we will study the use of leverage, volatility derivatives, and tail-risk hedging strategies; macro risk factors linked to interest rates and monetary policy; inflation risk and inflation-protected securities; "bubbly" assets such as cryptocurrencies and gold. Finally, we will discuss the distinctive challenges of incorporating private equity and other illiquid assets into a coherent asset allocation framework.
