The Effect of Asset Allocation From Bear to Bull Markets

Open Access
Author:
Agins, Zachary A.
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • Jingzhi Huang, Thesis Supervisor
  • James Alan Miles, Honors Advisor
Keywords:
  • asset allocation
  • personal investing
Abstract:
This study focuses on the three market corrections during the decade of 2000-2009. This study attempts to examine whether the record flight to safety during the Credit Crisis yielded the best returns. The first objective was to find which stock portfolios performed better from the time period starting after the S&P 500 lost 20% of its value until three months after the market hit its correction trough. The two portfolios considered were an equal weighted stock portfolio and the S&P 500 index. For each period the equally weighted stock portfolio outperformed the S&P 500, and had positive returns. The Sharpe ratios for the two portfolios are indicative that during market corrections investors should seek to better diversify their equity positions by having a portfolio with stocks that are equally weighted in each industry sector. The second objective was to find out whether allocating more assets to risk-free US Treasuries during these time periods yielded better returns than allocating more assets to stocks during the same periods. For all three periods back testing proved that reallocating a higher percent of assets into an industry equal weighted stock portfolio outperformed allocating assets to risk-free securities. These findings imply that for younger investors with a 10-15 year investment time frame, should allocate more of their assets during market corrections to capitalize on the subsequent rebound.