Larry J. Prather

Asset Allocation: A Recommendation for Resolving the Collision between Theory and Practice

We examine the creation of a low-cost optimal risky portfolio that individual investors can easily construct and manage. We consider five index mutual funds and three precious metals that are easy for investors to trade. Collectively, the mutual funds track the returns of the entire U.S. equity market, 98% of foreign stocks, U.S. investment grade bonds, all domestic REITs, and emerging markets. The three precious metals are gold, platinum, and palladium. Because these mutual funds are available in ETF form, we provide optimization results with and without short selling. Optimization results differ greatly from conventional wisdom regarding optimal asset allocation.

Indexing Institutional Funds

This article investigates alternative S&P 500 indexing strategies for institutional investors using S&P 500 institutional index mutual funds and the Standard and Poor’s Depository Receipts (SPDRs). This investigation is important because although SPDRs have lower advertised annual expenses, investors in SPDRs face bid–ask spreads and commissions. The authors present a model to illustrate how alternative index investments can be compared, compute average spreads using transaction-by-transaction data, compute risk-adjusted returns for the competing investments, and model the results under several scenarios.