RT Journal Article
SR Electronic
T1 The Gain-Pain Index: Asset Allocation for Individual (and Other?) Investors
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 34
OP 48
DO 10.3905/jwm.2022.1.173
VO 25
IS 2
A1 Javier Estrada
YR 2022
UL https://pm-research.com/content/25/2/34.abstract
AB Individual investors typically determine their asset allocation using investor questionnaires, which can be viewed as black boxes that generate a result without highlighting the benefits and costs of the portfolios considered. This article introduces an asset allocation tool—the gain-pain index—that overcomes this shortcoming. The proposed tool incorporates two critical variables found in investor questionnaires—the portfolio holding period and the investor’s risk tolerance—and broadens the definition of risk beyond volatility by considering the probability of suffering a loss and the magnitude of the loss. The model is used to determine optimal asset allocations for 21 countries and the world market for different holding periods and levels of risk aversion.