DYNAMIC ASSET ALLOCATION - INSIGHTS FROM THEORY

This paper provides a survey of the now considerable academic theory r elating to the practice of dynamic asset allocation. This work is scat tered through the literature and many of the key ideas are not as acce ssible or well known as they deserve to be. The paper begins by provid ing a definition of what is meant by dynamic asset allocation and a de scription of its most significant features. Next it develops the conce pt of path independence and its relationship to efficient diversificat ion through time. It is shown that this principle also applies to fund s whose performance is appraised relative to an index benchmark. The f inal sections of the paper describe the implications of recent work on market equilibrium and on performance measurement.