A SCENARIO-BASED APPROACH TO ACTIVE ASSET ALLOCATION

Efficient frontier-based optimization is driven heavily by the histori cal and the expected returns of the assets involved. In this study, th e authors present an asset allocation framework that uses stochastic o ptimization and scenario analysis to handle the: uncertainties associa ted with forecasting the expected returns, volariliries, and cross-cor relations of the assets. Furthermore the framework presented by the au thors enables investors to incorporate their views on market expected returns in che optimization phase. Finally, it allows the optimization process to determine the degree of currency exposure: (hedging) in mu lticurrency portfolios.