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Bridge over ocean
1 July 2005 Financial Analysts Journal Volume 61, Issue 4

Allocation Betas

  1. Martin L. Leibowitz, PhD
  2. Anthony Bova, CFA

The complexities of standard optimization can obscure the intuitive decision process that should play a major role in asset allocation. The use of allocation alphas and betas—with U.S. equity as the beta source—facilitates an intuitive approach and greatly simplifies the decision process. A portfolio's assets are separated into two groups: “Swing assets” are the traditional liquid asset classes, such as U.S. bonds and equity; the “alpha core” is all other assets, which are subject to more stringent limits. After the nontraditional assets are combined to form an alpha core, the result is a three-part efficient frontier: (1) a cash-to-core segment, (2) a fixed-core segment, and (3) an equity extension. The boundaries lead to a “sweet spot” on the efficient frontier where most U.S. institutional portfolios are clustered.

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