Nº 22-05: Evolutionary Finance for Multi-Asset Investors

Standard strategic asset allocation procedures usually neglect market interaction. However, returns are not generated in a vacuum but are the result of the market's price discovery mechanism which is driven by investors' investment strategies. Evolutionary finance accounts for this and endogenizes asset prices. This paper develops a multi-asset evolutionary finance model. Requiring little more than dividend and interest rate data, it facilitates an interesting glimpse into the inner workings of financial markets and provides a valuable guide to this class of models. While traditional mean/variance optimization is static and concerned with finding the optimal asset allocation, evolutionary portfolio theory is dynamic and its focus is on finding the optimal investment strategy. This paper shows that yield-based strategies generate asset allocations that outperform competing alternatives. Therefore, strategic asset allocation approaches that rely on such an economic foundation are evolutionarily advantageous for multi-asset investors.