Global Asset Allocation and Stock Selection
Asset Allocation and
Geopolitical Risk Analysis
Campbell R. Harvey
Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA
http://www.duke.edu/~charvey
Setting
February 3, 2003
• Campbell Harvey’s advanced elective course:
Global Asset Allocation and Stock Selection
surveyed to determine
– February global allocations
– Iraq war scenario probabilities
– Stock market impact in various scenarios
February Allocations
%
45
40
35
30
25
20
15
10
5
0
US Equity
US
US
US
Government Corporate Mortgage
Benchmark
Average
EAFE
Emerging
Markets
Benchmark Underweight
%
3
2
1
0
-1
-2
-3
US Equity
US
US
US
Government Corporate Mortgage
EAFE
Emerging
Markets
Benchmark Underweight
Global equities tactically underweighted by 2.2% in February
Geopolitical Risk Analysis:
Implications for S&P 500
Four war scenarios. Participants asked about the
impact on the S&P of the event over the next six
months.
• Stand down. All conflict avoided.
• Short and easy. War over quickly, minimal
causalities.
• Long. War not over in six months.
• Weapons of Mass Destruction. Either/or WMD
used on US troops or resurgence of domestic
terror.
War Scenarios
%
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
0.42
0.23
0.15
Stand down
Short and easy
Stand down
Short and easy
Long
Long
0.20
WMD
WMD
Forecasted S&P 500 Returns
%
20.00
15.00
10.30
9.91
10.00
5.00
0.00
-5.00
-10.00
-5.14
-10.86
-15.00
-20.00
-25.00
Stand down
Short and easy
Stand down
Short and easy
Long
Long
WMD
WMD
Downside: There is a 1 in 10 chance
the S&P 500 returns will be below …
%
20
15
10
5
1.23
0.73
0
-5
-10
-15
-15.63
-20
-25
Stand down
Short and easy
Stand down
Long
Short and easy
Long
-23.34
WMD
WMD
Upside: There is a 1 in 10 chance
the S&P 500 returns will be above …
%
18.23
20
18.38
15
10
2.38
5
0
-2.16
-5
-10
-15
-20
-25
Stand down
Short and easy
Stand down
Long
Short and easy
Long
WMD
WMD
Average of Individual Volatilities
(Confidence)
%
20
15
10
7.24
9.26
7.51
7.57
5
0
Stand down
Short and easy
Stand down
Long
Short and easy
Long
WMD
WMD
Forecast Disagreement
%
20.00
15.00
11.95
9.50
10.00
8.59
7.24
5.00
0.00
Stand down
Short and easy
Stand down
Short and easy
Long
Long
WMD
WMD
Downside versus Upside
%
5
4
3
2
1
0
-1
-2
-3
-4
-5
-0.71
-1.14
-2.96
-3.79
Stand down
Short and easy
Stand down
Long
Short and easy
Long
WMD
WMD
Calculated as (Upside-Mean)-(Mean-Downside). A value of zero indicates
that the 1/10 chance above and below are symmetric to the forecast.