Strategic Asset Allocation with Low-Risk Stocks: A Bootstrap Analysis

Volume 13, Number 2, Second Quarter 2015
Wai Mun Fong and Timothy Koh

Traditional asset allocations such as the 60/40 portfolio of stocks/bonds are not as well diversified as many investors believe since almost all the portfolio’s returns are driven by the stock component. This paper examines a novel approach to strategic allocation by combining stocks with low betas and high dividend yield. Our “beta-yield” portfolio exploits the beta anomaly (low beta stocks have higher risk-adjusted returns than high-beta stocks) and the hedging property of high dividend yield stocks in declining markets.We use bootstrap simulations to analyze the long-term performance of the beta-yield portfolio and find that it outperforms 60/40, 70/30, and 80/20 stock/bond portfolios in terms of shortfall risk, Omega ratio, and Prospect Theory utility. The results hold even with relatively high loss-aversion, and when the beta-yield strategy is assumed to have counterfactually low average returns.