Optimal Building Blocks for Single- and Multi-period Investment Management

Abstract

Selection of the asset class is crucial to the performance in investment management. Some studies have researched the asset allocation with modern portfolio theory and found that selecting asset class for the asset allocation is important not only for short-term investment but also for multi-period investment. Although researchers have compared asset allocation and security selection or found the new asset class with specific scheme, the attempt to make a new building block from the single security was unprecedented. Therefore, we formulate a model to find the optimal building block for single-period as well as multi-period investment. We also applied genetic algorithm to handle the population problem when selecting the ingredients of building block. We analyzed how the optimal building block has changed from the various settings, such as investor’s risk appetite, investment period, the number of assets in a building block and the goal. As a result, they included more commodities with higher risk tolerance in single-period investment. In multi-period investment, we discovered when we extended the building block with seven assets, it would better to invest to commodities with easy goal for five to ten years, and more stocks of developed countries for ten years. However, it was hard to find a huge tendency in general. Hence, we should equip the various set of assets for investment management.