Part 5/11:
The block bootstrap method involves randomly aggregating chunks of historical data — approximately 10 years at a time — to create a simulated life cycle of returns for domestic and international stocks, bonds, and treasury bills. This technique maintains long-term characteristics of asset returns which standard models often overlook, such as serial correlation and the clustering of volatility in extreme events.
By using this methodology, the authors aim to derive an optimal life cycle asset allocation by simulating one million hypothetical investment scenarios for a couple saving for retirement, which reveals unexpected preferences and allocations.