This document discusses asset allocation and portfolio management. It defines asset allocation as determining optimal allocations across broad asset classes like stocks, bonds, and cash based on an investor's time horizon and risk tolerance. The importance of asset allocation is that different assets react differently to market conditions, allowing diversification that can enhance returns and reduce risk. Portfolio management aims to balance risk and return by matching investments to objectives through asset allocation and rebalancing over time. It outlines steps like setting objectives, developing a strategy, and evaluating performance.
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Portfolio management and asset allocation12111
1. Asset allocation and portfolio
management
Mohammad qasem aljahmani
Accounting master
Omar abed alrahman hayajneh
Finance master.
2. Before making your investment
make sure :
1. Level of return
2. Risk
3. Liquidity
4. Transaction costs
3. Asset Allocation
The process of determining optimal
allocations for the broad categories of assets
(such as Stocks, Bonds, Cash, Real Estate, ...)
that suit your investment time horizon and
risk tolerance. OR
what proportion of a portfolio should be
placed in the relevant asset classes
4. The importance of asset
allocation
1. different asset classes react to changing market conditions in different ways.
2. appropriate asset allocation can help you maintain confidence through economic
ups and downs and even increase your potential for better returns over time.
3. To enhance return and reduce risk.
4. Establishing a well diversified portfolio may allow you to avoid the risks associated
with putting all the eggs in one basket.
5. Each asset class has different levels of return as well as risk and therefore will
behave and react differently to a given market situation
Note :Keep in mind that neither diversification nor asset allocation ensures a profit or
guarantees against loss.
5. Why resort to asset allocation ?
1. To diversify the risk (as don’t expect equity &
bond market to fall at the same time).
2. Since one does not know before hand what
economic situation would be tomorrow , but
it’s logical to invest in more than one asset
class.
6. How to do asset allocation ?
1. Divide the investment between the high and
low risk and minimize the risk .
2. Based on long and short term goals of the
investor and decide on the asset mix that will
fetch the best desired returns.
3. Sticking to your allocation pattern would
discipline you to buy low.
4. Reducing the equity component .
7. asset allocation decisions
involves 3 important variables
1. Time frame
2. Risk tolerance
3. Personal circumstances
8. What are asset classes?
It is often useful to group similar investments
together into asset classes.
what makes different investments similar?
9. Disadvantages
Categories can be useful, but are not perfect. A danger
inherent in asset allocation is assuming that asset
categories or asset classifications create homogeneous
groups of securities.
Assuming securities are more correlated (or subject to the
same risks) within a category than between categories can
be faulty.
Another problem is what Ennis (2009) refers to as
“category proliferation and ambiguity.” It is always possible
to further differentiate between categories, and some
securities seem to be so unique that they defy easy
categorization, going into an “alternative” category.
10. Some considerations in determining
the right asset allocation
In determining the right asset allocation
strategy for you, consider your:
1.Unique financial situation
2.Comfort with investment risk and flexibility
3.Retirement goals and time frame
11. some asset allocation strategies that blend stock, bond, and
short-term investments to achieve different levels of risk
and return potential.
12. Definition of Portfolio
Management
The art and science of making decisions
about investment mix and policy, matching
investments to objectives, asset allocation for
individuals and institutions, and balancing risk
against performance.
Portfolio management is all about strengths,
weaknesses, opportunities and threats in the
choice of debt vs. equity, domestic vs.
international, growth vs. safety, and many other
tradeoffs encountered in the attempt to
maximize return at a given appetite for risk.
13. Forms of portfolio management
1- Passive management : simply tracks a market index,
commonly referred to as indexing or index investing.
2- Active management : involves a single manager, co-
managers, or a team of managers who attempt to
beat the market return by actively managing a fund's
portfolio through investment decisions based on
research and decisions on individual holdings. Closed-
end funds are generally actively managed.
14. Purpose of Portfolio
Management
Portfolio management primarily involves
reducing risk rather than increasing return
Consider two $10,000 investments:
1) Earns 10% per year for each of ten years (low
risk)
2) Earns 9%, -11%, 10%, 8%, 12%, 46%, 8%, 20%,
-12%, and 10% in the ten years, respectively
(high risk)
15. Low Risk vs. High Risk
Investments
$30,000
$25,937
$23,642
$20,000
Low
Risk
High
$10,000
$10,000 Risk
$0
'92 '94 '96 '98 '00 '02
16. Low Risk vs. High Risk
Investments (cont’d)
1) Earns 10% per year for each of ten years (low
risk)
Terminal value is $25,937
2) Earns 9%, -11%, 10%, 8%, 12%, 46%, 8%, 20%, -
12%, and 10% in the ten years, respectively
(high risk)
Terminal value is $23,642
The lower the dispersion of returns, the greater the
terminal value of equal investments
17. The Portfolio Manager’s Job
Begins with a statement of investment policy, which
outlines:
1- Return requirements
2- Investor’s risk tolerance
3- Constraints under which the portfolio must operate
A person cannot be an effective portfolio manager
without a solid grounding in the basic principles of
finance
18. The Six Steps of Portfolio
Management
1) Learn the basic principles of finance
2) Set portfolio objectives
3) Formulate an investment strategy
4) Have a game plan for portfolio revision
5) Evaluate performance
6) Protect the portfolio when appropriate
