Modern Portfolio Theory : Our Asset Allocation Strategy

Speaker's notes: Risk is an everyday part of financial life. There are few decisions we can make which do not come with some degree of risk. However, it is important to understand and distinguish between different types of risks so we can better 'hedge' against potential unforeseen events and minimize our institution's exposure to financial dangers.

Asset allocation is one of portfolio management 's primary concerns. Asset allocation answers several questions. What risk-return trade-off are we comfortable with? In other words what amount of risk are we prepared to take to make a certain level of active return? At every level of active return there is an equivalent amount of risk. Many portfolio managers are judged merely on the return they have achieved without subsequent analysis of the risk they took to produce that return. This is the reason why we have seen the advent of new rogue traders like Kweku Odoboli. These traders want to make positions that give a certain amount of return so as to meet their stringent benchmarks.

In 2005, the vice president, chief investment officer, and their investment team met in order to compose a new asset allocation policy for the foundation’s investment portfolio worth $6.4 billion. One of the proposal’s suggestion was to reduce the overall exposure of the investment portfolio to domestic public equities. The proposal would also increase the allocation to absolute return strategies (with an “equitizing” and “bondization” program) and to TIPS. The new policy would slightly increase the Sharpe ratio of the foundation’s portfolio. They also needed to make a decision on a recommendation to pledge about 5% of the total value of the portfolio to Sirius V, which was the latest fund that specialized in global distressed real estate investments.

One of the foremost vital selections majority people face at a particular age is the selection of a portfolio of assets for retirement savings. These assets invested will be a major source of their retirement financial gain (Campbell & Viceira, 2002). It is vital for investors to understand the concept of asset allocation and how does asset allocation works in the market. The objective of this research paper is to identify the asset allocation proportions in the Australian Institutional Markets, comparing the different asset allocation in Australians superannuation fund, understanding the concept of why property only comprises a small part of percentage in a diversified portfolio and defining the strategies applied to allocate the assets.

Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.

Within any investment there is a certain amount of risk, which must be taken into account by an investor when deciding to invest. Risk is defined as the chance of financial loss or, more formally the variability of returns associated with a given asset. (Gitman, et al., 2011, p. 208)

Your portfolio’s asset allocation, i.e. the percentage invested in various asset classes, is arguably the most important determinant of your future returns.

The analysis is based on fund management through TIAA-CREF Variable annuity accounts (Teachers Insurance and Annuity Association- College Retirement Equities Fun

Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Systematic risk can be mitigated only by being hedged.

Risk is uncertainty. The more risk one takes, the more he or she stands to lose or gain. One cannot expect high returns without taking substantial risks.

Jeff Bull, an investor has some queries on investment theories and risk. He is interested in understanding the main types of portfolio risk and the core principles used to mitigate such risk and the key principles to investment allocation. The main portfolio investment theory is called Modern Portfolio Theory (MPT).

"Simply put, risk is uncertainty. The more risk you take, the more you stand to lose or gain. You cannot expect high returns without taking substantial risks."

In constructing your portfolio one of the most crucial steps is determining how exactly will be investing your funds. This is called asset allocation it is important because it allows us to customize and tailor the portfolio directly to your needs and wants. To get more technical, asset allocation is a strategy where the main focus is allotting a set amount of your portfolio's funds to particular assets classes. This is accomplished by look at several factors which include the asset classes themselves and how they work, your own personal goal timeline and lastly your risk tolerance.

In order to be successful, an investor must understand and be comfortable with taking risks. Creating wealth is the object of making investments, and risk is the energy that in the long run drives investment returns.

Pure risks which means that the risk must be real and not related to gambling