Asset Allocation Recommen-dations of Financial Advisors

Abstract

The authors observe that banks and financial advisors make recommendations for the asset allocation of individual investors. Determinants are the individual's stage of life, his/her risk tolerance and investment goals, as well as his/her liquidity needs. These recommendations are usually based on a heuristic approach. Modern Portfolio Theory, in contrast, postulates the optimization of a portfolio's return in consideration of its risk. The authors focus on determining the risk/return characteristics of the asset allocation recommendations for five asset classes (equities, bonds, real estate, hedge funds, cash) and compare them with risk-optimized portfolios. Their goal is to find out whether these are the best possible recommendations in terms of risk and return. They conclude that the recommendations of the financial advisors are not too far away from the efficient frontier.