Dynamic Asset Allocation with Horizon Risk:
Revisiting Glide Path Construction

Abstract

We compare the empirical distributions of equity and fixed-income returns at different time horizons and find that the risk of equities relative to fixed income is more acute at short time horizons than long time horizons, confirming previous research. This creates the opportunity to develop a dynamic asset allocation process that exploits the reduced horizon risk of equities relative to fixed income. We highlight key data on changing relative risk with time and leverage this information to introduce methods and concepts that inform glide path construction—the building blocks for a dynamic asset allocation process that can support lifecycle, target date retirement, and goals-based investing frameworks.

TOPICS: Portfolio construction, security analysis and valuation, fixed income and structured finance, performance measurement