Identifying the Best Asset Allocation Strategy for Pension Liabilities

Very Hard Asset Allocation Strategic Asset Allocation

John is a portfolio manager responsible for the strategic asset allocation of a multi-million-dollar pension fund. The fund primarily invests in equities, fixed income, and alternative assets. Recently, due to anticipated volatility in equity markets, John is reevaluating the long-term asset allocation strategy. He is considering various theoretical frameworks, including mean-variance optimization, the Black-Litterman model, and a liability-driven investment approach.

Which of these asset allocation strategies would best align with the objective of achieving a balance between risk and return while accommodating the unique liabilities of the pension fund?

Mean-variance optimization, as it focuses on maximizing returns for a given level of risk based on historical returns.

The Black-Litterman model, as it allows for the integration of subjective views on asset class returns with market equilibrium.

A liability-driven investment approach, as it directly addresses the long-term obligations of the pension fund and aims for risk minimization relative to liabilities.

Hint

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