Strategic Asset Allocation

Abstract One of the most important decisions many people face is the choice of a portfolio of assets for retirement savings. The leading academic paradigm of portfolio choice, the mean‐variance analysis of Markowitz, does not give adequate guidance for this long‐term investment problem because it assumes that investors care only about the mean and variance of return over a single short period. The book develops an alternative paradigm, the inter‐temporal model of Merton, into an empirically usable framework with the following implications. The safe asset for a long‐term investor is not a Treasury bill, but a long‐term inflation‐indexed bond that provides a stable stream of real income. A nominal bond is a good…