Asset Allocation

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.