According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio. Asset allocation decisions made by an investor are considered more important than other decisions such as market timing or security selection. In the research provided by Hensel (1991), performance attribution is one of the main components when choosing the right assets in a portfolio. The impact of any investment decision can be measured by comparing its outcome with the outcome of some alternative decision. Furthermore, according to Hensel (1991), every investor has to incorporate the minimum-risk portfolio, which is a combination of securities or asset classes that reduces the uncertainty of future portfolio returns to a minimum. In the paper published by Xiong (2010), it is presented that a portfolio’s total return can be disintegrated into three components: the market return, the asset allocation policy return in excess of the market return, and the return from active portfolio management. The asset allocation policy return refers to the fixed asset allocati... ... middle of paper ... ...rences Asset Allocation Definition | Investopedia. (n.d.). Investopedia - Educating the world about finance. Retrieved June 15, 2013, from http://www.investopedia.com/terms/a/assetallocation.asp Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision. Financial Analysts Journal, 47(4), 65-72. Ibbotson, R. G. (2010). The Importance of Asset Allocation. Financial Analysts Journal, 66(2), 1-3. Lynott J. William. (2005).Proper asset allocation ensures successful portfolio performance. Dermatology Times, 26(5), 96. Securities and Exchange Commission. (n.d). Retrieved on June 8, 2013 from http://www.sec.gov/investor/pubs/assetallocation.htm Xiong, J. X., Ibbotson, R. G., Idzorek, T. M., & Chen, P. (2010). The Equal Importance of Asset Allocation and Active Management. Financial Analysts Journal, 66(2), 1-9.
Dimensional's value strategies are based on the Fama/French research in multifactor portfolios designed to capture the return premiums associated with high book-to-market (BtM) ratios.
The dissimilarity among these two values is essential, particularly when considering investments. As it can be a perfect guide when dealings in the real market, the financial managers are not exempted to ignore the theoretical value by the fact that they vary.
Considering the importance of this, Yale’s investment Committee reviewed its portfolio at least once a year. In order to decide the target allocation, the organization performed a mean-variance analysis of the expected returns and risks and compared them with those of past Yale allocations and the current mean allocation of other universities. Moreover, the organization also examined the long-run implications of its allocation for the downside risk to the
The capital asset pricing model (CAPM) is a mathematical model that offers an explanation about the relationship between investment risk and return. By dividing the covariance of an asset's return by the variance of the market, an asset value can be determined. To ascertain the risk level of a particular asset, the market is evaluated as a whole. Unlike the DCF model, the time value of money is not considered. This model assumes the investors understands the risk involved and trades without cost. Two types of risk is associated with the CAPM model: unsystematic and systematic. Unsystematic risks are company-specific risk. For example, the value of an asset can increase or decrease by changes in upper management or bad publicity. To prevent total loss, the model suggests diversification. Systematic risk is due to general economic uncertainty. The marketplace compensates investors for taking systematic risk but not for taking specific risk. This is because specific risk can be diversified away. Systematic risk can be measured using beta. For example, suppose a stock has a beta of 0.8. The market has an expected annual return of 0.12 and the risk-free rate is .02 Then the stock has an expected one-year return of 0.10.
Firstly, this paper used empirical data to prove the existing of connections between personal preferences of individual investors and the portfolio choosing decision, which strongly challenged the classic portfolio choosing theory which was based on the mean-variance preferences, and provided new evidence for the irrational side of investors. The dataset this paper used was both enrich and unique, including market level, individual level and macro level, which made his argument very solid from all aspects that may involving in. Another brilliant part was that the author took one step further and investigated what constituted of lottery preference, both on micro and macro side. Both individual features and the society environment could have much influence on the stock market. The result of this paper suggested that the connections between the society environment and the stock market may be much stronger that we use to think.
Weighing the Portfolio Most investors do not choose just one investment. The best portfolios will feature a variety of stocks, bonds and other investments because this helps to insure a higher return and better security. Investors will generally place a portion of their money into bonds because it offers a lower risk investment. Another portion may be placed in higher risk investments so that the investor can garner a higher return rate. Since each investor has a different level of risk tolerance and personal needs, they should talk with a financial adviser to figure out the best way to weight their various investments.
Graham advocated that investors should diversify their portfolio in stocks and bonds. By doing so the investor can maintain their capital as well achieve growth in the portfolio (Myers, 2009). To overcome the market volatility investors should diverse their portfolios by investing in bonds and stocks. Graham urged the investors to avoid growth stocks since they underperform and are overpriced over a
The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
The following essay will expand on the usefulness and flaws of CAPM and other asset evaluation frameworks and in the end showing that despite all the evidence against CAPM it is still a useful model for determining asset investments.
Asset allocation is the process of deciding how to distribute an investor’s wealth among different countries and assets classes for investment purposes. An asset class is comprised of securities that have similar characteristics, attributes and risk/ return relationships. In other word, asset allocation defined as investing money or well diversified in different classes of assets, as stocks, bonds and money market funds.
Total Shareholder Return (TSR) is a critical key performance indicator (KPI) to measure portfolio performance as well as evaluate investment decision in firms which forms the crux of the research presented in this paper. TSR is a compounded and annualised measure including dividends paid to shareholders by Temasek however, it does not include capital injections by shareholders. Temasek is a long term investor and tracks its TSR over various time periods. Following gives Temasek’s portfolio performance
A crucial reason in favour of mental accounting and overconfidence is decision efficiency. Real-life investing scenario changes every moment Time-consuming and systematic thinking process seldom is allowed during the intense decision-making (Stewart Jr et al., 1999, Busenitz and Barney, 1997). Additionally, the ‘small world’ used by the economic theory, which only applied to strict condition, is not necessarily applicable in the practical investment decision. As the assumption in those analysis approach may not conform with real life well and for most of times, cognitive heuristics is more suitable for the uncertainty(Gigerenzer and Gaissmaier, 2011). However, there is also a few argument against them, for it may hinder people from examining their investment choice thoroughly. Research shows that they did not perceive themselves as risk taker, but in fact, they are more likely to take relatively low return alternatives as ‘opportunities’, indicating that they are risk-taking to a great extent(Palich and Ray Bagby, 1995). As a result of the illusion created by such factors, decision makers tend to be narrow-minded in composing strategies and unable to bring enough information into thought(Schwenk, 1988). It was demonstrated by several researches that decisions made by means of biases and heuristics impose
3. Basing one’s decision solely on an asset allocation’s mean and variance is insufficient to base one’s decisions, in a world in which asset class returns are not normally distributed; and,
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.