Strategic asset allocation in Brazil

We study the impact of asset returns’ predictability on optimal portfolio allocation, considering investors concerned with a steady flow of long-term consumption. Relying on a monthly database for 2006-2016, the analysis focuses on the Brazilian context covering returns on (1) a real short-term asset, (2) a long-term asset, (3) a Brazilian stock index, and five other state variables. Predictability of long-term assets returns has a significant impact on their overall optimal demand. In addition, by using the S&P500 index we show that foreign stocks are more predictable than the Brazilian index for moderately conservative investors