Portfolio Asset Allocation on LEE Pension Fund - Research Paper Example

Long-term corporate bonds had the lowest correlation (-0.011827), implying they would be a desired asset for risk reduction, among the portfolios, using increased diversification. Standard deviations (SD) and means were also calculated to give a relative comparison between the different asset classes regarding return and risk. Before the 1970s, real estate never existed as a recognizable and established investment “asset class.” As an alternative, the portfolios of organizational investors like pension funds entailed almost exclusively bonds, stocks, and cash.

However, this situation changed as inflation and modern portfolio theory caused the establishment of real estate as one institutional investment asset class. The current undesirable performance in the equity market implies real estate is progressively registering mixed-asset portfolios. Nevertheless, determining whether the desired return in real estate is one long-term phenomenon or a temporary thing is a concern that remains hugely unanswered. In simple terms, little or no even evidence exists to prove whether real estate ought to play an unswerving function in the mixed-asset portfolio across long-term and short-term investment horizons.

We intend to explore and give more light regard to the uncertainty surrounding the mixed-asset portfolio. This was our primary concern as far as this paper is concerned. To protect the portfolios from any short-term or long-term fluctuation in the market, the pension systems spread assets across a wide range of asset classes. This allowed each portfolio to uphold stability through turbulent market cycles. Every system's asset was invested in bonds, stocks, real estate, and global asset allocation strategies, with a small asset allocation to associate partnerships.

The assets incorporated in the analysis were given as follows: These investment categories exhibited imperfect correlations since when one category was wavering, another was doing exceedingly well or both were moving in the same direction: either doing well together or performing poorly (see table 1).

This was evidenced by the positive and negative correlation coefficients, which described the direction of movement between every asset class. Long-term corporate bonds had the lowest correlation (-0.011827), implying they would be a good asset for risk reduction, among the portfolios, by means of increased diversification. Moreover, the findings also proved that small capital stocks are highly and positively correlated with large capital stocks (correlation coefficient = 0.8348881). Spreading the portfolios across a wide range of assets minimizes the impact of temporary volatility that happened within every asset class.
Standard deviations (SD) and means were calculated so as to offer a relative comparison between the different asset classes with regard to return and risk. SCS had the biggest deviation from the mean (SD = 11.55 and Mean = 3.55). Treasury Bills, on the contrary, exhibited the smallest deviation from the mean (SD = 0.54 and Mean = 0.71).

Conclusion
This report has scrutinized how alternative mix-assets allocation on Pension Fund can be useful. It has specifically addressed the concern of whether the anticipated shift towards substitute asset classes can possibly occur as an alternative to funds allocation.