This chapter examines some of the practical implications of risk management in the context of asset allocation.

Asset allocation is the process of deciding how to distribute an investors wealth among different countries and asset classes for investment purposes. The asset allocation decision is not an isolated choice; rather, it is a component of a portfolio management process. Preliminaries 1. Insurance 2. Cash reserve Life Cycle Net Worth and Investment Strategies Phases In The Investment Life Cycle 1. Accumulation Phase 2. Consolidation Phase 3. Spending Phase 4. Gifting Phase

THE PORTFOLIO MANAGEMENT PROCESS The process of managing an investment portfolio never stops. Once the funds are initially invested according to the plan, the real work begins in monitoring and updating the status of the portfolio and the investors needs. Steps in the Portfolio Management Process 1. 2. 3. 4. Policy Statement Analysis Construct a Portfolio Evaluation and Monitoring

Policy Statement The policy statement is a road map; in it, investors specify the types of risks they are willing to take and their investment goals and constraints. All investment decisions are based on the policy statement to ensure they are appropriate for the investor. Because investor needs change over time, the policy statement must be periodically reviewed and updated. The process of investing seeks to peer into the future and determine strategies that offer the best possibility of meeting the policy statement guidelines.

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In the second step of the portfolio management process, the investor should study current financial and economic conditions and forecast future trends. The investors needs, as reflected in the policy statement and financial market expectations will jointly determine investment strategy. Economies are dynamic; they are affected by numerous industry struggles, politics, and changing demographics and social attitudes. Thus, the portfolio will require constant monitoring and updating to reflect changes in financial market expectations. Construct the portfolio The third step of the portfolio management process is to construct the portfolio. With the investors policy statement and financial market forecasts as input, the advisors implement the investment strategy and determine how to allocate available funds across different countries, asset classes, and securities. This involves constructing a portfolio that will minimize the investors risks while meeting the needs specified in the policy statement. Evaluation and Monitoring The fourth step in the portfolio management process is the continual monitoring of the investors needs and capital market conditions and, when necessary, updating the policy statement. Based upon all of this, the investment strategy is modified accordingly. A component of the monitoring process is to evaluate a portfolios performance and compare the relative results to the expectations and the requirements listed in the policy statement.