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    Role of Asset Allocation in Portfolio Management

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    Abhijeet Patil
    This document discusses the role of asset allocation in portfolio management. It defines asset allocation as dividing investments among major asset classes like stocks, bonds, real estate, and cash to balance risk and create diversification. The key points are: 1) Asset allocation aims to balance risk and return based on an individual's risk tolerance rather than focusing solely on selecting individual stocks or bonds. 2) The risk-return tradeoff is central to asset allocation, as investors must weigh potential returns against risks like losses. 3) There are several asset allocation strategies including strategic, constant-weighting, tactical, insured, and dynamic allocation which aim to balance and adjust allocations over time based on market conditions. 4)

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    Role of Asset Allocation in Portfolio Management

    Uploaded by

    Abhijeet Patil
    195 views10 pages
    This document discusses the role of asset allocation in portfolio management. It defines asset allocation as dividing investments among major asset classes like stocks, bonds, real estate, and cash to balance risk and create diversification. The key points are: 1) Asset allocation aims to balance risk and return based on an individual's risk tolerance rather than focusing solely on selecting individual stocks or bonds. 2) The risk-return tradeoff is central to asset allocation, as investors must weigh potential returns against risks like losses. 3) There are several asset allocation strategies including strategic, constant-weighting, tactical, insured, and dynamic allocation which aim to balance and adjust allocations over time based on market conditions. 4)

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    This document discusses the role of asset allocation in portfolio management. It defines asset allocation as dividing investments among major asset classes like stocks, bonds, real estate, and cash to balance risk and create diversification. The key points are: 1) Asset allocation aims to balance risk and return based on an individual's risk tolerance rather than focusing solely on selecting individual stocks or bonds. 2) The risk-return tradeoff is central to asset allocation, as investors must weigh potential returns against risks like losses. 3) There are several asset allocation strategies including strategic, constant-weighting, tactical, insured, and dynamic allocation which aim to balance and adjust allocations over time based on market conditions. 4)

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    195 views10 pages

    Role of Asset Allocation in Portfolio Management

    Uploaded by

    Abhijeet Patil
    This document discusses the role of asset allocation in portfolio management. It defines asset allocation as dividing investments among major asset classes like stocks, bonds, real estate, and cash to balance risk and create diversification. The key points are: 1) Asset allocation aims to balance risk and return based on an individual's risk tolerance rather than focusing solely on selecting individual stocks or bonds. 2) The risk-return tradeoff is central to asset allocation, as investors must weigh potential returns against risks like losses. 3) There are several asset allocation strategies including strategic, constant-weighting, tactical, insured, and dynamic allocation which aim to balance and adjust allocations over time based on market conditions. 4)

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    The key takeaways are that asset allocation aims to balance risk and return by diversifying investments across different asset classes like stocks, bonds, cash, etc. and that there is no single formula to determine the right asset allocation for every individual.

    The different asset allocation strategies discussed are strategic asset allocation, constant-weighing asset allocation, tactical asset allocation, insured asset allocation, and dynamic asset allocation.

    Strategic asset allocation adheres to a base policy mix based on expected long-term returns, while tactical asset allocation allows for short-term adjustments to capitalize on opportunities before returning to the strategic mix.

    Role of Asset Allocation

    in Portfolio Management

    PRESENTED BY:
    SHASHWAT MITTRA
    15020241105
    FINANCE 2015-17

    What is Asset Allocation ?

    It is an investing portfolio technique that aims to balance risk and


    create diversification by dividing assets among major categories such
    as cash, bonds, stocks, real estate, derivatives, etc.

    Each asset class has different level of risk and return, so each will
    behave differently over time

    The selection of stocks or bonds is secondary to the way we allocate


    our assets to high and low risk stocks, to short and long term bonds and
    to cash on the sidelines

    There isnt any simple formula to find the right asset allocation for
    every individual

    Risk Vs. Return

    The risk vs. return tradeoff is at the core of what asset allocation is all
    about

    Wanting highest possible return by choosing the assets with the highest
    potential is not the answer, case of 2009 can be seen, where investing
    in stocks of high potential was not the prudent plan of action

    What separates greedy and return hungry investors from the successful
    ones is the ability to weigh the difference between risk and return

    Risk appetite varies from investor to investor, hence the allocation of


    investment will vary, like investors with high risk tolerance should
    allocate more money into stocks

    Not relying on Financial Software

    Financial Software and Survey sheets designed by financial advisors


    and investment banks can be beneficial but should never be relied on
    solely. For example: As per an old thumb rule of advisors, they used to
    determine the proportion a person should allocate to stocks is to
    subtract the persons age from 100

    The financial software dont take into account other important


    information such as whether or not the person is a parent, retiree or
    spouse

    These financial software and planner sheets should only be used to take
    a rough idea

    Asset Allocation Strategies


    1.

    Strategic Asset Allocation

    This method adheres to base policy mix a proportional combination


    of assets based on expected rates of return for each asset class is done.
    For example:
    If stocks have historically returned 10% per year and bonds have
    returned 5% per year, a mix of 50% stocks and 50% bonds will be
    expected to give a return 7.5% per year

    2. Constant- Weighing Asset Allocation

    In this approach, we continually rebalance our portfolio For example: If


    one asset is declining in value, we would purchase more of that asset,
    and if that asset value is increasing, we would sell it

    A common thumb rule is that the portfolio should be rebalanced to its


    original mix when any asset class moves more than 5% of its original
    value

    3. Tactical Asset Allocation

    It can be described as a moderately active strategy, since the overall


    strategic asset mix is returned to when desired short term short term
    profits are achieved

    This strategy should be in a disciplined way, as we must be able to


    recognize when short term opportunities have run their course, and
    then balance the portfolio for the long term asset position

    4. Insured Asset Allocation

    We establish a base portfolio under which the portfolio should not be


    allowed to drop. As long as the portfolio achieves a return above its
    base, we exercise active management to try to increase the portfolio
    value as much as possible.
    If the portfolio drops down to the base value, we invest in risk free
    assets so that the base value becomes fixed

    5. Dynamic Asset Allocation

    Just the opposite of Constant-Weighing strategy, within which we


    constantly adjust the mix of assets as markets rise and fall and as the
    economy strengthens or weakens.
    As per this strategy, we sell assets that are declining and purchase
    assets that are increasing.
    We anticipate that if stock market is showing weakness then it will
    weaken further, and similarly if the stock market strengthens.

    THANK YOU

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