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Rebalancing, Conditional Value at Risk, and t-Copula in Asset Allocation

By Irving Wang

Traditional asset allocation methods for modeling the tradeo between risk and return do not fully reect empirical distributions. Thus, recent research has moved away from assumptions of normality to account for risk by looking at fat tails and asymmetric distributions. Other studies have also considered multiple period frameworks to include asset rebalancing. We investigate the use of rebalancing with fat tail distributions and optimizing with downside risk as a consideration. Our results verify the underperformance of traditional methods in the single period framework and also demonstrate the underperformance of traditional methods in a multiple period rebalancing
framework.

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Advisor: Aino Levonmaa, Emma Rasiel

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