This study set out to extensively examine the
cost of asset allocation. We introduced a new concept
of optimal asset classification; this concept provides an
upper limit of performance level that a classification
scheme can possibly achieve, so that we can estimate
current classifications’ performance levels. We explicitly
evaluated the two most commonly employed withinstock
classification schemes: style and industry classification.
The expenses of the current classifications were
arguably substantial, and it turned out the cause was their
factor-based approach, which pursues only diversification
potential.
This article’s findings suggest that investment performance
is significantly affected by the employed asset
classification scheme. There is, therefore, a definite need
for investors to be much more careful in selecting an
asset classification. Furthermore, diversification benefits
should not be the sole rationale for asset allocation.
This study set out to extensively examine thecost of asset allocation. We introduced a new conceptof optimal asset classification; this concept provides anupper limit of performance level that a classificationscheme can possibly achieve, so that we can estimatecurrent classifications’ performance levels. We explicitlyevaluated the two most commonly employed withinstockclassification schemes: style and industry classification.The expenses of the current classifications werearguably substantial, and it turned out the cause was theirfactor-based approach, which pursues only diversificationpotential.This article’s findings suggest that investment performanceis significantly affected by the employed assetclassification scheme. There is, therefore, a definite needfor investors to be much more careful in selecting anasset classification. Furthermore, diversification benefitsshould not be the sole rationale for asset allocation.
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