STRATEGIC AsseT ALLOCATION) Jemma 225 RE at (Bim (Rm = Rell | = ON Security Expected Value ofthe non- Expected value ofthe ket compors snarket component of scourity isexcess remem component of seeuity is ‘The non market component of excess renumn is uncortelsted with the market component, The vari equal the sum of the variance of the par Ri-Rp = Vara + va (Bim (Rm RFI 12 OF the sum will thus it 4 tL | Variance of Security C's. Variance of te aon ariance ofthe market market component of component of. security C's ex stetura security C's or Var. (R-RE) = BE, Var. [Rn-Re} The risk of a security measured by variance can this, be ivided into wo paris. One that is mot related to market risk sand one that is. Moreover, larger the later, the more sensitive ; willbe the security's return ro the market moves. Many financial expe ue that asset allocation imporant feetor in determining returns for an inves portfolio. Asset allocation is based on the principle that differen assets perform ifferendy in different market and economic q conditions. fundamental justiietion for asset allocation $8 the i notion that “diferent asset classes offer returos_that are not | perflly eori141Ed, hence diversification reduces the overall Sk 4 in terms of the Variability of returns for a given Tevel of return, Academic research has painsikingly explained ihe importance of asset allocaon and the problems of active Surategic asset allocation is a portfolio stateay 1 allocations for various aset classes, thenrebalancing the portfolio 10 maintain these Allocations ean deviate due to differing res from various asse Strategic asset allocation Is traditional apprcach to building porifotio, With strategic asset allocation at investor can determi | hhow much of his money should be invested it broad categories | investments, such a stocks or bonds, and once he has decided 1p an allocation he sticks with that allocation for maay’ yours) is 4 Saeple ace allocation ise peice of sealigning Rep REN ponftio's asset composition in order to aevonunodae changes fevvot wetenfonten market climate. Ststegic asset allocation calls for setting ry in eee aOR iocaions and then petiodicaly rebalanciag ti portfolio back those targets as investment returns skew the orignal asset alloca percentages wept i akin to a "buy and hold” stectey her than an ing proveh, f course, the strategic asset allocation targets may char cover time as the client's goals and noeds chatge and as the th horizon for major events, such as retirement and college fundi ‘rows shorter. IN OBJECTIVES OF STRATEGIC ASSET ALLOCATION © 1 primi goss of a strategie *sseCUlTOSHITOM i to Create” asset mix that seeks (0 provide the eptinsl ralanee betw expected risk and rerun for a longterm inyesment noriz Genealy speaking, stratepic ase alloestion sa to economic environments, 1.€., they do not chanwe their Bosties relative to changing market or eeopinc condos ‘With the right asset mix and proper diversitication, a strate asset allocation portfolio can be optimized 10 earn the grea possible rate of return at a given level of risk. By usin: disciplined strategic approach one can avoi’ making emotic short-term decisions based on current market events, WB vowirworns? | Portfolios are made up of different asiei classes, with ¢ CG chasse class comprising 4 cern percentage of toe toal port ie. aset allocation), Asset classes teactdif-rcnly wo change the economic and market ouloak, Susiewie asset _allose involves changing these perwentage locations in. tresponse expected shifts in the market. For example, \ analysts forese(FOU FISK ANO RETURN (INCLUDING STHATEGIC ASSET ALLOCATION ‘imminent upswing in tbe equity markets, an investor may want fo increase the percentage of her portfolio allocated to stocks. involved in the process of strategic 1. The fitst step is assessing Ohe's tolerance for risk and dhe Investing time-frame, If one can foresee not needing the invested money for an extended period of time, one can be nore aggrestve and alloete moe socks. 2. Once it is known how aggressive one cin be one can deere bow mach ofthe money should bein each ase class (such as cash, bonds or stocks) by looking at the Tong oy term expected returas and risk fevels of each asset h class. Then, each asset classi broken dow into addon categories; socks, for example, would be broken down ito ‘large cap, small cap, national, international and emerging Trarkets, jt to mane afew sub-cegories 3. One can then develop a suategie ase lloation plan tie assigns & ttget persenigge elsaton for each underiying o 4. One can follow a stale aset allocation approach by using a balanced muta! fund which chooses and monitors one allocation 5, The strategic asset allocation approach involves sticking \with’ one’s original allocation over long periods of time rather chan reacting to what is currently occurring in the markets. GERS OF USING STRATEGIC ASSET ALLOCATION 1. The biggest problem with strategic asset allocation is that one’s exposure to each asset class remains fixed, regardless of performance or marh The other drawback of s sie asset with performance drag, As investors always rem diversified, one portion of a portfolio is nearly always underperforming another. Typically it can during while bonds di omic expansions, stocks tend wo outper down overall performance, During theFT ol orate 9 a voc os. tne es Thee ea eee ‘ocr re aaa “sraicgic asset allogation approach to investing. While” deg Hill CONCEPT OF TIME VALUE OF MONEY / The simple coneep of tie value of mosey sta he value the money reeival today is ore thin the ale of sme aD tmonsy received afr 2 coraln pesod. In ties word mou 1000 toy oF afer 0e Year, lay than afer one year. Thi is evans you. sale the cue teeege of money higher tan fu nf money fer Year. The phenomena i ftered 0 line preference Reasons for Time Preference of Money (@ The future is always uncertain and involves ssh 32 inavidual ean never be evan of geting es inflow infu rece ewe eave nos oh tan of og