Asset Allocation and Geopolitical Risk Analysis

1
Asset Allocation and Geopolitical Risk Analysis
Global Asset Allocation and Stock Selection

• Campbell R. Harvey
• Duke University, Durham, NC USA
• National Bureau of Economic Research, Cambridge
  MA USA
• http//www.duke.edu/charvey

2
Setting February 3, 2003

• Campbell Harveys advanced elective course
  Global Asset Allocation and Stock Selection
  surveyed to determine
• February global allocations
• Iraq war scenario probabilities
• Stock market impact in various scenarios

3
February Allocations

4
Benchmark Underweight

Global equities tactically underweighted by 2.2
in February
5
Geopolitical Risk Analysis Implications for SP
500

• Four war scenarios. Participants asked about the
  impact on the SP of the event over the next six
  months.
• Stand down. All conflict avoided.
• Short and easy. War over quickly, minimal
  causalities.
• Long. War not over in six months.
• Weapons of Mass Destruction. Either/or WMD used
  on US troops or resurgence of domestic terror.

6
War Scenarios

7
Forecasted SP 500 Returns

8
Downside There is a 1 in 10 chance the SP 500
returns will be below

9
Upside There is a 1 in 10 chance the SP 500
returns will be above

10
Average of Individual Volatilities (Confidence)

11
Forecast Disagreement

12
Downside versus Upside

Calculated as (Upside-Mean)-(Mean-Downside). A
value of zero indicates that the 1/10 chance
above and below are symmetric to the forecast.