The Most Important Methods Of Asset Incrication

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Asset allocation is a portfolio management technique that is concerned with balancing between income-oriented and growth investments in a portfolio. This apportioning enables the investor to capitalize on the risk/reward trade off between the various assets in the portfolio and gain from both profits and growth. There are four basic steps to asset allocation; selecting which asset categories to include in the portfolio (stocks, bonds, real estate, money market, financial derivatives or precious metals), choosing the most suitable proportion to allot to each asset class, identify a suitable variety within the set target and then finally diversifying within each asset category.

An investment philosophy is one’s approach to tolerance for risk in investments. It may be conservative which means you accept very little risk and are generally rewarded with relatively low rates of return. Another investment philosophy is moderate also known as risk indifference, this means one accepts some risk as they seek capital gains through slow and steady growth. Lastly, one may have an aggressive investment philosophy or be more of a risker seeker. Often times, people strive for a very high return by accepting a high level of risk. Going into the game, we were informed that like

Asset allocation is when someone invests in a variety of places to reduce the overall risk of investing. Asset allocation is used for individuals to reduce their overall risk because only part of their money is tied up in each investment.

Another important concept that we must understand is Portfolio, which according to the Wall Street preferred website (www.investopedia.com) is “a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.”

Consider one of the most urgent problems of modern financial management, namely portfolio management. Analysis of this issue primarily is interesting for the head of analytical department of banks and investment companies and private investors.

Firstly, portfolio theory has become an essential strategy in the modern investment market. In general, according to Elton (2011), it is a common situation that each person may possess a portfolio which is combined with real assets such as a vehicle or a house, including financial assets such as stocks and bonds. An investment portfolio is a series of chosen securities for investing purpose. In order to avoid risks or pursue for profits, investors are faced with enormous number of choices. If one is considering structuring an investment portfolio, the alternative composition of various assets seems overwhelming. So how to make a decision and what is a good , even best portfolio are the points in the first part.

Harry W. Markowitz, the father of “Modern Portfolio theory”, developed the mean-variance analysis, which focuses on creating portfolios of assets that minimizes the variance of returns i.e. risk, given a level of desired return, or maximizes the returns given a level of risk tolerance. This theory aids the process of portfolio construction by providing a quantitative take on it. It integrates the field of quantitative analysis with portfolio management. Mean variance analysis has found wide applications both inside and outside financial economics. However it is based on certain assumptions which do not hold good in practice. Hence there have been certain revisions to it, so as to make it a more useful tool in portfolio management.

There are various different financial products that one may choose to invest. Each financial product has its special features. Some of the investments have low risks and thus the return is also low. Others have high risks but offer you high potential returns. Returns are the gains or losses from security in a particular period and are usually quoted as a percentage (Carpenter, 2009). The kind of returns investors expect from capital markets are influenced by some factors like risk. The risk is the chance that an actual investment return will be different from expected (Bouleau, 2011). Risk can also be defined as the possibility of losing some or even more of an original investment.

How a portfolio is diversified depends on an investor’s risk aversion, investment goals and life cycle or time horizon. Accordingly, if an individual is in the accumulation life cycle phase they have a longer time horizon and can diversify their assets in riskier securities which will provide a greater return, increasing the investors wealth over the years. However, when an individual is in the preservation state, they have a short time horizon and cannot afford to be invested in riskier securities. Therefore, investors in the preservation phase choose investments with high liquidity that have low risk and return (Hirt, et al., 2006). As with any investment, it is important to adhere the portfolio to the clients risk aversion preferences and investment

A portfolio is the collection of securities an investor holds. Portfolio theory is about risk, return, preferences and opportunities. E.g. if there are three assets, A, B, and C and the expected rate of return and volatility of each of the assets. Comparing asset B to asset A investors would prefer asset B over asset A because even if asset A and B have the same volatility the expected return of asset B is much higher than A. Similarly when comparing asset A to Asset C investors would prefer C, over A because, A and C have the same expected rate of return but C has much lower volatility. So portfolio theory is essentially about maximizing a portfolios return and minimizing its risk. Whichever the case, the primary objective of

‘Portfolio theory and the capital asset pricing model (CAPM) are essential tools for portfolio managers and other stock market investors’

Financial world is full of volatile market movements which expose any investor to tribulations that can lead to wipe away of huge amount of invested capital. Global Economy has seen great depressions including that of Mortgage crisis in 2008 that led to millions of job being lost and investors losing confidence in market. There is a saying in financial world that ‘an individual is rewarded for the amount of risk they take while investments’. There exists variety of people with diversified mentality when it comes to investing. Some are risk averse while others are risk loving. People’s attitude towards risk are characteristic to their investment behaviour. According to Economic times. Risk management refers to process of identifying risk in

Comparing the investments in the chart above, an investor can use the standard deviation and correlation of returns to determine the given risk of the investments, as well as which investment choice would yield a better return. With the information provided a portfolio made up of equal parts B and C will ultimately be less risky than a

To achieve a Balanced portfolio, we must spread assets over our 3 overarching Asset Classes: Cash, Fixed Income, and Equity.