Equity Asset Allocation Model for EUR-based Eastern Europe Pension Funds
This paper is aimed to explain the choice of instrument mix for EUR-based long-term equity investors, like pension funds, in the Eastern Europe. It is assumed that investments into local securities are the investors’ preferred choice. Markowitz mean-variance optimization was used for determining optimal portfolios. Exponentially weighted historical time-series were used for input data. After finding an efficient set of portfolios hypothetical 100€ was invested (as of March 1993) into the portfolio and this investment was benchmarked against EUR-hedged MSCI World index. Different portfolio mixes with several rebalancing frequencies were tested in the way described. Portfolio mix proposed for real investments is the following: MSCI, North America (40%); MSCI, Europe (35%); MSCI Pacific (10%); MSCI Emerging Markets Free (10%) and MSCI Eastern Europe (5%). This portfolio mix gave a positive result over the period compared to benchmark. Suggested rebalancing frequency is 1 month.
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