This paper has two main objectives. The first is to propose a measure to integrate the market and credit risk. We define a way to convert credit risk into market risk, and then define an integrated risk measure. Based on this integrated measure, an Adjusted Sharpe Index is defined as a metric to compare various portfolios in the surface frontier in terms of financial efficiency. Second, several methodologies of estimating efficient portfolios were evaluated, under the perspective of a global long-term investor, incorporating estimation risk and evaluating the effect of credit risk in the model selection. The results support the use of the Michaud (1998) resampling methodology as it offers better results in terms of financial efficiency, allocation stability and diversification. Using the Michaud approach, the efficient surface frontier is defined and generated.

Two well-known issues in asset allocation problems, using Markowitz optimization are: the instability of the output asset allocation, and the absence of other sources of risk (despite market risk) in the analysis. These drawbacks make the results of the model misleading and is a reason why Markowitz-based models have not played the important role that they should in the global portfolio management.The first issue derives from the fact that the output portfolios are driven by the risk/return estimation, which usually generates an unfeasible dynamic of the asset allocation.

The most famous problem with this technique is the substitution problem, where two assets with the same risk but slightly different expected returns generate strongly different asset allocations. The optimizer would give all the weight to the asset with the higher expected return, leading to very unstable asset allocation. This is particularly problematic when we have an investor with a long-term investment horizon (e.g., pension funds, and central banks). In this case, the asset allocation stability is much more relevant as the investor often wants to follow a passive strategy.Recent literature has tried to overcome the previous problem of leading to unfeasible portfolios where some of the proposed models are discussed. The main focus of those models is to find out how realistic portfolios can be created considering that the values used for risk and return are not deterministic but just estimates. It should be noted that the misspecification of returns is much more critical than that of the variances (Zimmer and Niederhauser, 2003).

Integrating Market, Global portfolio management, International financial data, Business Information Systems, BIS, Portfolio Theory, Capital Market Line, CML, Capital Asset Pricing Model, CAPM, Market portfolio, Integrated Risk Measure, Sharpe Index, Financial Analysts, Financial and Quantitative Analysis.