| In this dissertation, we discuss several topics that arise throughout the financial planning process for institutional investors employing the asset allocation approaches.;First, we evaluate characteristics of the current equity style segmentation rule as the basis to define core asset classes. We find that the traditional style definitions lack several key aspects such as stable definitions, critical diversification capabilities, low turn-over, and potential performance enhancement under the current practical settings. In contrast, the empirical test results indicate that industries possess better characteristics, and thus, are proper building blocks for portfolio construction.;Second, we investigate the effect of the duration enhancing overlay (DEO) strategies to the defined benefit pension plans, many of which remain underfunded since the 2001-2002 recessionary periods. We show that the DEO strategies can improve performance and reduce risks by adding duration to the portfolio. Versions of the strategies are evaluated via historical data as well as forward-looking economic projection system.;Third, we evaluate several versions of the Markowitz portfolio model with respect to patterns in equity markets. We form a long-only portfolio of momentum strategies via industry-level assets; the strategy beats many others over numerous markets and time periods and provides a good benchmark for competing optimization models. Simple Markowitz models are quite effective, as long as the proper historical time period is chosen for the stochastic projections. Investment performance of optimal asset allocation models can be improved by considering the momentum effects in the parameter estimation procedures.;Last, we discuss the role of momentum in the performance of active equity managers. Empirical evidence shows that the excess return patterns of long-only industry-level momentum strategies are highly correlated with the active funds in the growth and the core domains, especially since the publication of the momentum effects in 1993. The best managers possess stronger similarities as compared to the worst performing managers, who have low correlation with momentum. Investment performance of momentum strategies at the industry level is competitive, lying between top 10% and 25% of funds on each period. We speculate on the causes and persistence of these patterns, relative to optimal asset allocation. |
