Asset Allocation Of Mutual Fund In Risk Framework

Asset Allocation is the process in optimizing investment portfolio at certain risk level based on the return of assets class and the investor's risk attitude, and which is the key determinant in investment management of mutual fund. Also the market risk is a more important factor in assets allocation decision, the risk-managering can efficiently lowered investment risk, meet investor's risk preference and control the probability of extreme losing happenning. To the most extent, mutual fund managers could get long-term and abnormal return by optimizing investment portfolios and diversifing risk. Used theoretical and empirical methods this paper focus on how to construct a best asset allocation model and investment decision system at different risk framework.In general, typical asset allocation for mutual funds defined by classification mainly included Strategy Asset Allocation (SAA), Tactical Asset Allocation (TAA) in this paper. Strategy asset allocation also named as asset allocation policy, and also it is a long-term asset allocation policy, assigned by asset class proportion among the investment asset in long-term horizon to gain maximum returns at a certain risk level. Strategy asset allocation is the important insurance to reach the object of investment for investors and the basis resource of the investment's performance. Tactical asset allocation is often a bias from the long-term benchmark to gain the excess returns, according to forecast market variability in long-term or short-term asset assignment. In the short-term investment horizon, tactical asset allocation is a more important method to gain excess return from market.Markowitz (1952)'s Modern Portfolio Theory (MPT) and W.Sharpe (1962)'s Capital Asset Price Theory (CAPM) all are the most important investment decision theory as the investment guide for fund managers. As for Modern Portfolio Theory, investors have the efficient asset allocation among the asset calss for the object investment to gain the maximum returns and to diversify risk, while a return rate is required and short sales is limited, get the efficient frontier graph consisted of portfolios sets of asset calss for investment. Then Sharpe (1966, 1975) in mean-variance (MV) framework got the maximum returns at a unit risk. But both the Variance and Standard-deviation are not the best risk measurement for the mutual fund investors, because investors have more and more specified risk aversion and required. The source of securities market risk is becoming more and more complex and any investment portfolio must be the return tradeoff at a certain level risk, furthermore we evaluate the investment performance at a certain level risk. It's becoming more and more important to select a risk measure properly for asset allocation of mutual fund, and regarding on a certain risk level constraints specified, the purpose in this paper is to set up asset allocation model to meet the investors risk required. We will set up asset allocation model based on risk constraints framework to analyze and examine what is the difference for these asset allocation models regarding the different risk constraints.Based on the Markowitz Portfolio Theory and M-V (Mean-Variance) model regarding as a basis asset allocation decision framework, then extending the risk framework to more risk sector, i.e. in perspectively to measure investor's risk aversion (γ), Systemic Risk (β), Tracing Error Variation (TEV), Value at Risk (VaR), Lower Partial Moments (LPMs) and Risk budgeting as the risk framework. We input these risk frameworks as a constraints to asset allocation model and optimization system in theoretical and empirical analysis.In empirical analysis, we examined China stock and bond market as investment asset of mutual fund, i.e. the object of investment asset return and risk benchmark, and have gotten these results as inflows:(1) Slected Investor's risk aversion of mutual fund as a risk constraint, and constructed most optimization asset allocation model, we found the different risk aversion (γ) level of investors could differently impacting on the asset allocation decision, and higher aversion with more lower risk assets;(2) Only focus on the risk from market and selected systemtic bate(β) value as a risk constraint, then constructed most optimization asset allocation model, we found that Beta (β) value as risk measurement for asset allocation decision is more reseaonable to use in practically compared to Variance and Standard Deviation;(3) For the risk from the fund manager's active investment, we selected Tracking Error Variation (TEV) as a risk constraint, then constructed most optimization asset allocation model, and we found that the total risk as a fixed constraints as a constant, and in TEV constraints framework, the performance can be improved significantly;(4) For the possible of loss in the asset of mutual fund, we selected Value at risk (VaR) as a risk constraint, then constructed most optimization asset allocation model, and found that the asset allocation model met the investor's downside risk VaR constraints, also it's a more better and more efficient asset allocation decision methods;(5) To meet investor's downside risk aversion, we selected Lower Partial Matrix (LPM) as a risk constraint, then constructed most optimization asset allocation model, and found that Asset allocation decision in LPMs framework for the downside risk aversion's investor, is less than or the same as the MV optimal model;(6) For only focus on the risk and ignore the return, we selected risk budgeting as a risk framework, and based on measuring and decomposing the total risk to do asset allocation whithin risk budgeting constraints, which could efficiently control the total risk of mutual fund.Finally, researching on the fund manger investment style and asset allocation policy, we also examined the asset allocation style and the asset allocation policy of China mutual funds, the result as inflow:(1) Used the holding based analysis method to examine 40 China stock investment funds, and we found that most of China stock mutual fund mostly had the same investment style in different investment period and could not diversify the risk from securities market.(2) Used the time series regression analysis to examine 94 China investment funds, also found that all fund can be explained with a lower level by assets allocation policy, but active management (Stock picking and Market timing) can significantly improve the performance these funds. Mutual funds in China still have not set up a better asset allocation model and system, and need to improve it in the long-term development.To sum up, this paper mainly focused on the theoretical and empirical analysis of the assets allocation of mutual funds based on certain risk framework.