Journal of Investment Strategies

Integrated stock–bond portfolio management

Xiaochuan Pang, Shuping Wu and Shushang Zhu

  • We propose a stock-bond portfolio selection model according to the principles of CreditMetrics.
  • CVaR is used as the risk measure and is more suitable for stock-bond portfolios than symmetrical risk measures, such as MAD, especially for small scale portfolios.
  • The integrated stock-bond portfolio outperforms the separate stock-bond portfolio, suggesting that managing stock and bond jointly can reduce total risk of the portfolio.

This paper proposes a stock–bond portfolio selection model that naturally integrates market risk and credit risk via the principles of CreditMetrics. Conditional value-at-risk is adopted as the risk measure for portfolio selection since bond returns are usually skewed. Both simulations and backtestings show that conditional value-at-risk is an appropriate risk measure for stock–bond portfolio selection and that by providing more flexible and stable investment opportunities the integrated portfolio outperforms the portfolios that consider stocks and/or bonds separately.

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