AN ASSET ALLOCATION PUZZLE

This paper examines popular advice on portfolio allocation among cash, bonds, and stocks. It documents that this advice is inconsistent with the mutual-fund separation theorem, which states that all investors s hould hold the same composition of risky assets. In contrast to the th eorem, popular advisors recommend that aggressive investors hold a low er ratio of bonds to stocks than conservative investors. The paper exp lores various possible explanations of this puzzle and finds them unsa tisfactory.