As in Chapter 3, annual revision strategies are examined, with an investor initially choosing amongst four basic assets - UK equities, commercial real estate, long-term government bonds and a risk-free asset - over the period 1977-1994. However, instead of the effects of a fixed constraint in real estate investment being considered, the model was extended to include a variable constraint on real estate, with annual revisions of up to ±5% permitted.15 The investment universe was then expanded to include Far East equities, in order to assess their effect on portfolio composition. Table 7.2 shows the means and standard deviations of the realised returns of the asset categories. For all asset categories except real estate, the model used ten years of historical data to forecast portfolio weights for the next period. A Markov regime-switching model was employed to provide a simple regime-switching forecast for real estate returns, with investment first taking place in 1977. The performance of portfolios held by investors with varying attitudes toward risk was examined, and compared with the results from the MPI model used in Chapter 3.
15Five percent was chosen as an example; thus a fund with £ lbn under management may buy or
sell up to £50m p. a.