What is the optimal mix of equity and debt that an investor should invest in a single company?
If an investor invests in both the debt and equity of a company, they are in effect de-levering the company (or reversing part of the capital structure decision of the company).
Asset allocators, such as pension funds, tend to invest in both the equity and debt of companies as determined by their weighting in their benchmark indices. This seems like a rather arbitrary method of investing based on the amount of issuance. At worst it may be counterintuitive in that higher debt issuance (potentially more leveraged company) would have bond investors buying more of that company's debt.
How should an investor quantitatively decide on the optimal mix of debt and equity for their portfolio? Should an investor ever invest in both the debt and equity in the same company if the management of the company is in the best position to determine the optimal capital structure?
How should the optimal proportion of debt for high yield debt issuers and investment grade issuers be treated differently given that debt can be looked at as a default free bond and a short put option on the issuers equity?