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Prudent Public Sector Investing and Modern Portfolio Theory: An Examination of Public Sector Defined Benefit Pension Plans
Author(s) -
STALEBRINK ODD J.,
KRIZ KENNETH A.,
GUO WEIYU
Publication year - 2010
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/j.1540-5850.2010.00967.x
Subject(s) - portfolio , pension , asset allocation , modern portfolio theory , actuarial science , asset (computer security) , public sector , sample (material) , business , economics , financial economics , finance , computer science , chemistry , computer security , economy , chromatography
This research examines the extent to which public pension programs allocate assets in a manner that is consistent with an optimal portfolio, as defined by Modern Portfolio Theory (MPT). The examination is pursued by way of a statistical analysis, using a portfolio optimization model and data on some of the nation's largest public DB plans. The analysis illustrates that the majority of the plans in the sample are incurring far more risk in their portfolios than is optimal given their target rates of return and that this risk level is a result of nonprudent allocation across asset classes. The findings suggest that there might be opportunities to improve the long‐term performance of defined benefit plans by adjusting asset allocation targets and legal lists in a manner that is more consistent with MPT.