Asset Allocation by IT4921X


									Asset Allocation

    Portfolio Management
What is Asset Allocation (AA)?
 Asset allocation is the practice of diversifying the
  portfolio between different asset classes and / or products.

 Each asset class reflects peculiar characteristics, risk-
  return profile not being shared by others.

 Asset allocation can be decided to …
      Achieve some objective
      Match investor’s profile
Asset Allocation idea/ need –
 The performance of assets may vary from year to year and is
  not easily predictable.
 Mixture of assets is more likely to meet the goals.
 Fundamental idea: different asset classes offering non-
  correlated returns (or inversely correlated) can be pooled
  together in a portfolio for diversification …
 Good Asset Allocation would reduce risks and variability of
  expected returns.
 Asset Allocation becomes ineffective if done within similar
  or correlated asset classes.
How to decide Asset Allocation?
Asset Allocation depends upon the return that an
investor is looking at….
      If your Investor is targeting a return of 10 % what you will
       Suggest? I will suggest him an Asset Allocation –

              Equity 50%
              Return @ 15 %

              Debt 50%
              Return @ 5 %
 Asset Allocation – Benefits
Asset allocation is the primary/ main determinant of long-term
portfolio performance rather than superior product selection or
market timing
                                               Asset allocation is a key
                                               factor in determining the
                                               success of an investment
                                               strategy. According to a
                                               widely recognized
                                               financial study by
                                               Brinson, Singer &
                                               Beebower, published in
                                               the Financial Analyst's
                                               Journal in 1995, asset
                                               allocation can account for
                                               up to 93.6% of portfolio
             Focus on Asset Allocation
Impact on Return in Long Term

                                                                  Asset Allocation

                                                Size Timing
                                            Sector Selection
                                        Stock Selection
                                    Style Timing
                                Market Timing

                                         Probability of Success
Asset Classes
                    Broad Classes

         Growth         Income          Preservation

     Equities       Bonds             Cash

     Real Estate    FIS / Mortgages   Gold


       Market Cap        Style            Origin

      Large Cap     Growth            Domestic
      Mid Cap       Value             International
      Small Cap     Blend
Asset Allocation => Risk Profile

                 Asset Allocation as per Profile *

                                 Equity   Debt       Cash

   Aggressive                     75%     20%        5%

   Moderate                       55%     40%        5%

   Cautious                       35%     60%        5%

   Conservative                   20%     75%        5%
   * For Illustrative purpose only.

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