Strategic Asset Allocation

Introduction

Strategic asset allocation (SAA) is one of the most challenging problems in finance. It deals with long-term investment, that is, how households, pension funds, and sovereign wealth funds--for example the Norwegian sovereign wealth fund that is managed by Norges Bank Investment Management--should allocate their wealth across large asset classes. The difficulty of the problem stems partly from the lack of sufficient data to be able to assess different strategies over long periods of time. For this reason, state-of-the-art practices require a deep understanding of both static and dynamic asset pricing theories, good knowledge of empirical facts, and the ability to combine the above with econometric and advanced financial modeling. 

In this course, we will go over key elements, theories, and modern practices of SAA. We will start with the objective, framework, and performance measurement issues of SAA. We will cover practical aspects of mean-variance investing, we will then move to dynamic theories and models, then to the modern approach of factor investing, "alpha" generation, and real assets. The course oscillates between the normative approach of maximizing the utility of an investor and the positive approach of trying to understand the statistical properties of asset prices and returns. 

Course content

The course will cover the following topics (provided enough time):

• The problem and objective of strategic asset allocation
• Static investment strategies
• Dynamic asset allocation
• Factor theory, factors, and factor investing
• Real assets
• Generating "alpha"