This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond--stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior beliefs and specifications of the likelihood are explored. In the dynamic setting, recursive utility is assumed, and attention is paid to obtaining analytical results when possible. Results under both full and limited-information assumptions are discussed.
I thank Itamar Drechsler, Lubos Pastor and Moto Yogo for helpful comments and Jerry Tsai for excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Jessica A. Wachter, 2010. "Asset Allocation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 175-206, December. citation courtesy of