Asset Allocation and Geopolitical Risk Analysis Global Asset Allocation and Stock Selection Asset Allocation and Geopolitical Risk Analysis Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey

Setting February 3, 2003 Campbell Harvey’s advanced elective course: Global Asset Allocation and Stock Selection surveyed to determine February global allocations Iraq war scenario probabilities Stock market impact in various scenarios

February Allocations %

Benchmark Underweight % Global equities tactically underweighted by 2.2% in February

Geopolitical Risk Analysis: Implications for S&P 500 Four war scenarios. Participants asked about the impact on the S&P of the event over the next six months. Stand down. All conflict avoided. Short and easy. War over quickly, minimal causalities. Long. War not over in six months. Weapons of Mass Destruction. Either/or WMD used on US troops or resurgence of domestic terror.

War Scenarios %

Forecasted S&P 500 Returns %

Downside: There is a 1 in 10 chance the S&P 500 returns will be below … %

Upside: There is a 1 in 10 chance the S&P 500 returns will be above … %

Average of Individual Volatilities (Confidence) %

Forecast Disagreement %

Downside versus Upside % Calculated as (Upside-Mean)-(Mean-Downside). A value of zero indicates that the 1/10 chance above and below are symmetric to the forecast.