Industry Asset Allocation Model Based On Industry's Business Cycle Index

In the past two years, stock market has reverted to value strategies. Because industrial cycle index differs from one industry to another, investment by industry group is central to value investment. Asset allocation is the most important step in portfolio management. Yet, studies on the systematic, quantitative analysis of asset allocation by industry group remain few.This work firstly studied the prerequisites needed for asset allocation by industry group, and the relationship between industrial cycle and stock index of an industry group. Guided by APT, this work also constructs an industry selection model based on industrial cycle index, and a multi-factor model to forecast the return on an industry index. Further, this work creates an asset allocation by industry group model according to the theories of portfolio management, and a straight-line allocation method by Sharpe Ratio to improve portfolio performance.In the light of the hypothesis of Neutral Capital Market, CMA and EMH, the necessity and availability for industry asset allocation in Chinese stocks market has been studied. The result of an empirical study show that industry asset allocation is necessary and active industry asset allocation is effective.Provided the relationship between business cycle and stock market cycle, this work found that the correlation between an industry's index and its business cycle varies, depending on the stability and persistence of its prosperity, and the P/E level of an industry's stock shares. Thus, the industry selection model is constructed via comprehensive Benefit and Expense Analysis.Then, the multi-factor model to forecast an industry's stock index is built according to APT. Empirical evidence shows that the addition of other variables in forecasting the return on an industry is feasible.Finally, this work proposes that the industry asset allocation by MVO can be enforced by the prediction of all industries'index return and the measurement of incurred risks; and the straight-line allocation method by Sharpe Ratio is recommended.