The role of the equity risk premium in the shortfall risk of target-date funds

Authors

  • Max B. Kalman Bank of America Merrill Lynch, New York

DOI:

https://doi.org/10.61190/fsr.v20i4.4710

Keywords:

Bootstrap, Retirement, Equity risk premium, Shortfall, Target-date fund

Abstract

Target-date mutual funds are unique because the fund manager is expected to maintain the most efficient allocation for the investor in different investment climates. Using a bootstrap simulation with forward-looking equity risk premiums, we illustrate that a 50/50 stock/bond portfolio will run out of money less frequently than a target-date fund if future stock returns replicate past stock returns. When we introduce equity risk premium adjustments, a portfolio with a greater weight in bonds still outperforms a target-date fund. This analysis suggests that these funds may need to reconsider their asset allocation strategies irrespective of market conditions.

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Published

2011-12-31

How to Cite

Kalman, M. B. (2011). The role of the equity risk premium in the shortfall risk of target-date funds. Financial Services Review, 20(4), 265–284. https://doi.org/10.61190/fsr.v20i4.4710

Issue

Vol. 20 No. 4 (2011): FSR Winter 2011

Section

New Original Submission

License

Copyright (c) 2011 Academy of Financial Services

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