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Assume that there is NO exchange rate risk. You are managing an equity MPF in Hong Kong and wonder about your global asset allocation. You believe that foreign markets will outperform HK, but nothing is sure. You do a mean variance optimization and find that you should allocate 80% abroad. You know that the theory of the CAPM tells you to allocate according to market capitalization weights; hence you should invest more than 95% in non-Hong Kong equity. On the other hand you observed the standard of MPF in Hong Kong is only to invest 40% abroad (average over all equity MPFs).
Note, that there is no RIGHT answer. Please consider that you are writing a short memo to your investment committee.
a. In the absence of specific expectations about returns in Hong Kong or abroad, what would regret theory suggest as global asset allocation?
b. Given all the information above, what will you choose as a percentage of asset allocation and why?
c. You decide to forget about regret and simply try to obtain the best risk-adjusted return.
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