Are Benchmark Asset Allocations for Australian Private Investors Optimal?

Abstract

This article examines whether the benchmark asset allocations recommended by financial planning groups for Australian private investors are optimal on the basis of modern portfolio theory. The mean–variance characteristics of the various asset classes are derived from historical indices. The return–risk values of the recommended portfolios are determined, and a simple method of iso-risk maximum return calculation using the Excel Solver command is utilized to determine the corresponding optimal portfolios. Applying this methodology, the portfolios resulting from the benchmark asset allocations are found to be significantly suboptimal.

TOPICS: Wealth management, portfolio theory, risk management, performance measurement