1. Asset Allocation
Definition: In simple words, asset allocation means how the investor’s money being distributed into different asset classes.
Explanation: Asset allocation can be referred as an investment strategy that used to balance risk and return by assigning a portfolio's assets. The portfolio’s assets will be apportioned based on the individual's goals, risk tolerance and investment horizon. Asset allocation is said to be an investment strategy due to it is able to minimize risk via diversification. There are three prime asset classes: equities, fixed-income, and cash. They act in different ways over time due to the risk and return levels are not same. Asset allocation helps in securing the returns through diversification and create a less risky portfolio compare to the individual assets. Assets performing well can offset the losses of assets that doing bad.
2. Risk involved in asset allocation (Types of risk)
Risk can be meant by the possibility for an investment's real return will be different than expected. To make it clearer, which means the probability of losing part or entire original investment. Although asset allocation or what we said diversification can minimize risk, the risks are still exist especially when the assets are allocated in improper way.
Failure in determining the risk To avoid the tough problem of risk in equity, investors tend to look at the average return. But to rebalance our portfolio, we need to look into the risk specifically.
Inaccurately apportion the asset When the assets apportioned incorrect may increase the risk and cause greater risk to the investors. For example, if the investor put huge portion of his asset to the high risk asset class and facing losses, the small portion in...
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...s in your mind.
Phase 3 : Choosing Asset Classes
Now we can determine how to break down asset classes into more specific portion. Besides that, investing in international markets is useful in preventing from investing too densely on a particular country’s market.
The two major ways that most stocks classified are the size of the company and their expected performance. Hence, investors should evaluate the company before investing.
Bonds are expected at growth with low risk. Most investors separate their bond portion equally between nominal bonds and inflation-protected securities. Nominal bonds are government and corporate bonds while inflation-protected securities tends to contribute real return over inflation.
Phase 4 : Picking Individual Assets
Buy or sell your individual investments to make your portfolio nearly matches your asset allocation plan.
The financial challenge in the managing risk simulation was to balance between preserving capital and capital appreciation in the investment of funds based on a persons’ risk tolerance. The simulation targeted the stock mix for a client’s aversion to risk and the ability of the investment portfolio to have an expected rate of return. The prediction of fund future prices acted as a hedge and had an impact on the rate of return depending on the changing financial landscape of a company. The overall effect was to juggle the mix based on past history and predict a future outcome.
...r investments that can support the other weight and balance their portfolio and therefore alleviate some of the risk they face.
This assignment aims to employ a dynamic CPPI strategy and discuss its effectiveness in managing an Index Portfolio. After defining strategic criteria, we construct an optimal portfolio based on the Mean-Variance theory. We then manage it for the defined one-year period and apply classical (e.g. Sharpe Ratio, Treynor Ratio) as well as CPPI-specific (e.g. Omega Ratio, T2, M2) performance measures to create a consolidated portfolio view. Finally, using data form the Wharton Database we employ a multifactor analysis and discuss the performance of the managed Index Portfolio and its risk characteristics.
What is risk? Risk is not a peril, rather perils are the causes of risk. Perils should not be confused with hazards, which are contributing factors to perils. Broder and Tucker suggest that risk is limited to the uncertainty of financial loss, the variations between actual and expected results, or the probability that a loss has occurred or will occur (2012, p. 3). Risk is further classified as “speculative”, such as the potential for both loss and gain that exists in gambling, and “pure risk”, equating to any loss/no-loss situation to which insurability may apply. Risk can be further divided into how it applies to three common categories: personal (people assets), property (material assets) and liability (legal issues).
As a result, the topic of ‘risk management’ can be related to a biblical passage in The Book of Ecclesiastes, Chapter 11:5-6. According to Solomon, “As thou knowest not what is the way of the spirit, nor how the bones do grow in the womb of her that is with child: even so thou knowest not the works of God who maketh all. In the morning sow thy seed, and in the evening withhold not thine hand: for thou knowest not whether shall prosper, either this or that, or whether they both shall be alike good” (2009, p. 975). Thus, as stated previously, risk consists of uncertainty and risk management is the process of mitigating such risk in order to prevent counterproductive consequences. The Lord is the all-knowing entity throughout the universe, and
The advantages of retaining internal control on endowment allocation across asset classes and managers are the assets manage by internal managers. Because of it, the decision making between Kings College bursar and investment committee regarding the endowment performance is efficient. Moreover, Kings College has no relationship and no administrative burden to take care of. Finally, passive investment in equity index funds fit with the risk preferences of investment committee. The long-run objectives were to achieve total return of 3.35% with the least possible risk.
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Market Risk is also known as Systematic Risk due to its broad impact on investments. The level of Market Risk depends on the probability that the entire market will decline and drag down the values of all companies. With Market Risk, investors stand to lose value irrespective of the companies, business sectors, or investment vehicles they are invested in. It can be difficult for investors to protect themselves against market risk, since investment strategies, like diversification, is mostly ineffective (Investopedia,
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:
Risk is characterized as an occasion that has a probability of happening, and could have either a positive or negative effect to a project ought to that risk occur. A risk may have at least one causes and, on the off chance that it happens, at least one effects. For example,
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.
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.
The unique goals and circumstances of the investor must also be considered. Some investor are more risk averse than others. Equity stocks have developed particulars techniques to optimize their portfolio holdings. Thus, portfolio management is all about strengths, weakness, opportunity and threats in the choice of debt v/s. equity, domestic v/s. international, growth vs. safety and numerous other trades-offs encountered in the attempt to maximize return at a given appetite for risk.
Risk is the potential loss resulting from the balance of threat, vulnerabilities, countermeasures, and value. ...
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.