Integrated stock–bond portfolio management

Abstract

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.