A scenario-based approach to active asset allocation

Efficient frontier-based optimization is driven heavily by the historical and the expected returns of the assets involved. In this study, the authors present an asset allocation framework that uses stochastic optimization and scenario analysis to handle the: uncertainties associated with forecasting the expected returns, volariliries, and cross-correlations of the assets. Furthermore the framework presented by the authors 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 multicurrency portfolios.