ASSET ALLOCATION

17TH NOVEMBER,2008.
PROF. V.K. AGARAWAL
 INTRODUCTION
PORTFOLIO MANAGEMENT IS A LONG
TERM INVESTMENT BUT IN THE
TODAY’S MARKET CONDITIONS IN
WHICH THE INDIVIDUAL INVESTORS
HAVE LOST THE CONFIDENCE IN THE
MARKET DUE TO IT’S
UNPREDICTABLE BEHAVIOUR, ARE
CONFUSED DUE TO THE WORST LAST
WEEK IN OUR MARKET’S HISTORY,
MANY PEOPLE HAVE HAD LOST
ENOUGH AND CAN’T STAND TO LOSE
ANY MORE.
• THE SITUATION THAT HAS
UNFOLDED OVER THE PAST FEW
WEEKS ESPECIALY HAS HAD A
PROFOUND IMPACT ON HOW PEOPLE
VIEW THE MARKETS.

• PRESENT MARKET IS NOT AN

INVESTOR FFRIENDLY MARKET. IT’S
MORE A TRADER’S MARKET.
• WE ALL KNOW THAT MARKETS GO
UP, GO DOWN, AND DO EVERYTHING
IN-BETWEEN. BUT SOME EXPERTS SY
THIS TIME IS DIFFERENT. THERE ARE
A NUMBER OF UNDERLYING
FINANCIAL ISSUES THAT WE HAVEN’T
EXPERIENCED BEFORE, AND SOME
ARE UNSURE HOW WE’LL RECOVER
FROM IT, AND HOW LONG IT MIGHT
TAKE. IN SUCH A SCENARIO, HOW
WE SHOULD LOOK AT LONG-TERM
INVESTING?
 ASSET ALLOCATION:
MONEY PROPERLY INVESTED
DOESN’T TAKE TIME TO APPRECIATE.

EARNING MONEY IS JUST NOW

ENOUGH IN TODAY’S WORLD.
INVESTING IT IN PROPER FIELD IS
EQUALLY IMPORTANT.

IN OTHER WORDS PROPER

ALLOCATION OF THE ASSET IS
REQUIRED.
• ASSET ALLOCATION IS THE
IMPORTANT PART OF ANY WEALTH
MANAGEMENT SERVICES.

• IT IS THE FINANCIAL JARGAON FOR

DECIDING HOW MUCH TO INVEST IN
VARIOUS INVESTMENT CATEGORIES.
 PURPOSE:
• TO ENHANCE RETURN AND REDUCE
RISK.
• DIFFERENT CATEGORIES OF ASSETS
BEHAVE DIFFERENTLY.
• EQUITY STOCKS, FOR INSTANCE, OFFER
POTENTIAL FOR BOTH GROWTH AND
INCOME, WHILE BONDS OFFER
STABILITY AND INCOME.
• THE BENEFITS OF DIFFERENT ASSET
CATEGORIES CAN BE COMBINED INTO A
• ESTABLISHING A WELL DIVERSIFIED
PORTFOLIO MAY ALLOW YOU TO AVOID
THE RISKS ASSOCIATED WITH PUTTING
AL THE EGGS IN ONE BASKET.
• PROPER ASSET ALLOCATION IS
IMPORTANT FOR LONG TERM RETURN
THAN SPECIFIC INVESTMENT CHOICES.
• TO GENERATE ADEQUATE RETURNS TO
MEET THE FINANCIAL GOALS AT
DESIRED LEVELS OF RISK.
• TO BALANCE RISK BY MEANS OF
DIVERSIFYING.
• EACH ASSET CLASS HAS DIFFERENT
LEVELS OF RETURN AS WELL AS RISK
AND THEREFORE WILL BEHAVE AND
REACT DIFFERENTLY TO A GIVEN
MARKET SITUATION.
• PROCESS OF CONSCIOUSLY SPREADING
YOUR INVESTMENTS ACROSS VARIOUS
ASSET CLASSES IN ORDER TO INSULATE
YOUR ENTIRE PORTFOLIO FROM THE
POOR PERFORMANCE OF ANY SINGLE
“A GOOD INVESTOR DOES NOT PUT

ALL HIS EGGS IN ONE BASKET”.

 WHAT IS ASSET
ALLOCATION?
• ASSET ALLOCATION MEANS
DIVERSIFYING YOUR MONEY AMONG
DIFFERENT TYPES OF INVESTMENT
CATEGORIES, SUCH AS STOCKS,
BONDS AND CASH.

• THE OBJECT IS TO REDUCE RISK AND

ENHANCE RETURN. HENCE, WE NEED
TO MANAGE THE PORTFOLIO.
 ASSET CLASSES
DEFINITION:

THE PROCESS OF ALLOCATING

MONEY BETWEEN EQUITY STOCKS
AND FIXED INCOME SECURITIES
SUCH AS BONDS AND FIXED
DEPOSITS IS CALLED ASSET CLASSES
 IT’S A PORTFOLIO BUILDING.

 IT’S A PROCESS IF OPTIMIZATION OF

THE RETURN AND RISK OF THE
INVESTOR.

 DIVERSIFYING YOUR MONEY AMONG

DIFFERENT TYPES OF INVESTMENT
CATEGORIES
 DIVIDING THE INVESTMENTS
BETWEEN ASSET CLASSES:
 EQUITIES
 BONDS (RBI RELIEF BONDS, GOVT. OF
INDIA SECURITIES)
 MUTUAL FUNDS
 REAL ESTATE
 COMMODITIES (GOLD / SILVER)
 ANTIQUES / ART
• PROPER ASSET ALLOCATION IS
IMPORTANT FOR LONG TERM
RETURN THAN SPECIFIC
INVESTMENT CHOICES.
• TO GENERATE ADEQUATE RETURNS
TO MEET THEFINANCIAL GOALS AT
DESIRED LEVELS OF RISK.
• TO BALANCE RISK BY MEANS OF
DIVERSIFYING.
• EACH ASSET CLASS HAS DIFFERENT
LEVELS OF RETURN AS WELL AS RISK
AND THEREFORE, WILL BEHAVE AND
REACT DIFFERENTLY TO A GIVEN
MARKET SITUATION.

• PROCESS
 WHY RESORT TO ASSET
ALLOCATION?
• TO DIVERSIFY THE RISK (AS DON’T
EXPECT EQUITY & BOND MARKET TO
FALL AT THE SAME TIME).
• SINCE ONE DOES NOT KNOW
BEFOREHAND WHAT ECONOMIC
SITUATION WOULD BE TOMORROW,
IT IS BUT LOGICAL TO INVEST IN
MORE THAN ONE ASSET CLASS.
• PROPER ASSET ALLOCATION IS MORE
IMPORTANT TO LONG TERM THAN
SPECIFICA INVESTMENT CHOICES.
• ASSET ALLOCATION IS MORE
IMPORTANT THAN SECURITY
SELECTION, ESPECIALLY FOR LONG
TERM INVESTMENT.
• BUT SINCE GUESSING EACH ASSET
CATEGORY WILL DO BEST AT A
CERTAIN TIME IS VERY DIFFICULT.
• IT CAN MAKE SENSE TO DIVIDE YOUR
INVESTMENTS AMONG ASSET
CATEGORIES.
• UNDERSTANDING THIS STRATEGY CAN
BE KEY TO INVESTMENT PROCESS.
• MOST INVESTMENTS TEND TO DO WELL
WITH NO APPARENT SCIENCE IN BULL
PHASES.
• SCIENCAE OF INVESTING COMES TO
THE FORE WHICH MANAGING
INVESTMENTS EITHER IN A BEAR PHASE
OR IN TIMES OF EXTREME VOLATILITY.
• DIFFERENT ASSET MAY PEAK AT
DIFFERENT TIMES MAY ALSO
UNDERPERFORM.
• NO ASSET CLASS HAS SINGULARLY
OUTPERFORMED OVER THE
LONGRUN, WHETHER IT WAS THE
BOND FUNDS THAT WERE AT THEIR
BEST IN 2000 AND 2001 OR MID-
CAPS IN 2002, 2003 OR 2004 OR THE
SENSEX IN 2005 AND 2006.
IN SHORT, DIVERSIFICATION IS THE
PRACTICE OF SPREADING MONEY
ACROSS VARIOUS INVESTMENT
SEGMENTS TO REDUCE RISK BY
PICKING THE RIGHT GROUP OF
INVESTMENT THAT MAY BE ABLE TO
LIMIT THE LOSSES.

REDUCE THE FLUCTUATION OF

INVESTMENT RETURNS WITHOUT
HAVING TO FOREGO POTENTIAL
 HOW TO DO ASSET
ALLOCATION?
• DIVIDE THE INVESTMENT BETWEEN
THE HIGH AND LOW RISK AND
MINIMIZE THE RISK.

• BASED ON LONG AND SHORT TERM

GOALS OF THE INVESTOR AND
DECIDE ON THE ASSET MIX THAT
WILL FETCH THEBEST DESIRED
RETURNS.
• STICKING TO YOUR ALLOCATION
PATTERN WOULD DISCIPLINE YOU TO
BUY LOW.
• REDUCING THE EQUITY COMPONENT.
• OVER THE PAST FOUR / FIVE YEARS
BECAUSE OF THE BULL RUN IN EQUITY
MARKETS, MOST INVESTORS WOULD
HAVE BEEN TEMPTED TO PUT THEIR
ENTIR MONEY IN EQUITIES.
• IN PAST EIGHT MONTHS DUE TO FAL OF
• WHILE EQUITIES HAVE FALLEN, SAFE
ASSETS SUCH AS GOLD HVE SHOWN A
RALLY.
• IF EQUITY RISE, GOLD WOULD IN ALL
PROBABILITY WILL BE FLAT.
• IF EQUITY FALLS, SAFER ASSETS LIKE
BONDS AND GOLD WOULD PICK UP.
• EACH ASSET CLASS HAS DIFFERENT
LEVELS OF RETURN AS WELL AS RISK
AND THEREFORE WILL BEHAVE AND
REACT DIFFERENTLY TO A GIVEN
MARKET SITUATION.
 BEFORE MAKING
INVESTMENT MAKE SURE:
 LEVEL OF RETURN

 RISK

 LIQUIDITY

 TRANSACTION COSTS
 NOTE:
• BANK FD PROVIDES COMPLETE
PROTECTION AGAINST CAPITAL LOSS

• DURING HIGH INFLATION TIMES,

BANK DEPOSIT MAY NOT PROVIDE
RETURN EVEN TO BEAT INFLATION

• CAPITAL VALUE REDUCES IN REAL

TERMS EVEN THOUGH THERE IS NO
LOSS.
 ASSET ALLOCATION
DECISIONS INVOLVE 3
IMPORTANT VARIABLES
2. TIME FRAME

4. RISK TOLERANCE

6. PERSONAL CIRCUMSTANCES
 DEPENDING ON YOUR AGE, LIFE
STYLE AND FAMILY COMMITMENTS,
FINANCIAL GOALS
YOU NEED TO DEFINE YOUR
INVESTMENT OBJECTIVES AND
GOALS OF LONG TERM AND SHORT
TERM.
 ASSET ALLOCATION
PROCESS:
FIRST APPROACH
FACTORS FOR ALLOCATION OF
ASSETS:

3.RISK TOLERANCE

5.INVESTMENT OBJECTIVE

7.TIME HORIZON
 1. RISK TOLERANCE (INDIVIDUAL
INVESTOR)
• DETERMINE RISK TOLERANCE*

• DETERMINE THE ASSET*

• LIABILITIES*

• NETWORTH*
IT VARIES INVESTOR TO
INVESTOR
THE INDIVIDUAL CAPACITY OF RISK
TOLERANCE IS THE STARTING
POINT WHICH HAS TO BGE
ANALYSED FOR ALLOCATING ASSETS
AS IT FOCUSES PSYCOLOGY OF
THE INDIVIDUAL INVESTOR*.
IF THE INVESTOR IS RISK TAKING IN
NATURE, ASSETS INHIS PORTFOLIO
WOULD BE OF A HIGHER RISK .

AND IF THE INVESTOR IS RISK

AVERSE IN NATURE, THE ASSETS
WOULD BE HAVING A LOWER RISK
CLASS.
 STATE IN LIFE:
A YOUNGER PERSON, HAVING A SAFE
LIVELIHOOD AND FEW DEPENDENTS,
CAN TAKE MORE RISK WHILE
CHOOSING HIS PORTFOLIO.

IF HE DOES NOT NEED MONEY FOR 25

YEARS AND IS COMFORTABLE WITH THE
UPS AND DOWNS OF THE STOCK
MARKET, HE MAY CONSIDER AN ASSET
ALLOCATION ON HIGHER SIDE IN
STOCKS. DEFINITELY NOT 100%.
 PRINCIPLE:
LOWER THE AGE HIGHER THE
RISK AND HIGHER THE AGE
LOWER THE RISK THE INVESTORS
CAN TAKE.

AS THE AGE INCREASE, ABILITY

TO TAKE RISK INCREASES*
FINANCIAL INDEPENDENCE
VARY DEPENDING ON:

• THE RISK PROFILE OF THE

INVESTORS

• THE AMOUNT OF CAPITAL THEY

INVEST

• TARGETED CAPITAL

• LUCK AND TIMING

HOWEVER, MORE CAREFUL PLANS
CANBE CHALLENGED BYSPECIAL,
UNFORSEEN CIRCUMSTANCES SUCH
AS PRESENT RECESSION, FINANCIAL
TURMOIL.
 POPULAR APPROACH
METHOD
FINANCIAL OBJECTIVE METHOD
REQUIRES PLANNING AN
INVESTMENT AS PER THE PERSONAL
NEEDS AND TAKING A COMMON
SENSE APPROACH TOWARDS THE
INVESTMENT DECISIONS.

IN SHORT, YOU PLAN YOUR

FINANCIAL NEEDS IN FUTURE AND
INVEST ENOUGH MONEY SO THAT
YOU WILL BE ABLE TO REALIZE
 RISK PROFILE AND INVESTMENT
OBJECTIVES
EXAMPLE - 1
STATUS < 30 31 – 45 46 – 55 56 – 60
AGE YEARS YEARS YEARS YEARS
SINGLE CAREFREE BUILDING ADDING TO PLANNING
WEALTH WEALTH FOR CARE
FREE
MARRIED PROPERTY BUILDING PLANNING RETIREMENT
PLANNING
NO KIDS TOP WEALTH RETIREMENT FOR CARE
PRIORITY FREE
MARRIED PROPERTY PLANNING PLANNING RETIREMENT
PLANNING
TWO KIDS TOP CHILDEN’S FOR FOR
PRIORITY EDUCATION CHILDREN’S CHILDREN’S
HIGHER FUTURE
EDUCATION
 RISK PROFILE
EXAMPLE - 2
INVESTMENTS KUMAR (30 YRS.) VIVEK (55 YEARS)
MARRIED MARRIED
NO CHILDREN TWO CHILDREN
FIXED INCOME 10% 20%
EQUITIES 30% 20%
PROPERTY 50% 50%
GOLD 5% 5%
CASH 5% 5%
AGGRESSIVE PORTFOLIO

• EMPHASIZES GROWTH
• STOCKS OR EQUITY FUNDS - 65%
• BONDS OF FIXED INCOME - 25%
• SHORT TERM MONEY MARKET
FUNDS OR
CASH
• EQUIVALENTS - 10%
• LONG INVESTMENT TIME FRAME

• SHORT TERM EMERGENCIES

• MIDTERM GOAL – BUILDING A HOME

• LONG TERM GOAL RETIREMENT IN

LIE
 MODERATE PORTFOLIO

THE PORTFOLIO SEEKS TO BALANCE

GROWTH AND STABILITY

IT RECOMMENDS
• STOCKS – 50%
• BONDS – 30 %
• SHORT TERM – 20%
• REGULAR INCOME WITH MODERATE
PROTECTION AGAINST INFLATION.

• EQUITY COMPONENT PROVIDES THE

POTENTIAL GROWTH WHEREAS THE
COMPONENT INBONDS AND SHORT
TERM
INSTRUMENTS HELP BALANCE OUT
FLUCTUATION IN THE STOCK
MARKET.
 1. CONSERVATIVE
PORTFOLIO

• STOCKS OR EQUITY FUNDS - 25%

• BONDS OR FIXED INCOME FUNDS

- 50%

• MONEY MARKET FUNDS - 25%

 CAUTION
NET WORTH:

IF ONE OWNS GOOD ASSETS AND

HAVE FEW LIABILITIES I.E., HAVING A
HIGH NET WORTH, ONE CAN AFFORD
TO TAKE MORE RISK AS ONE HAS A
CUSHION OF ASSET THAT CAN
SAFEGUARD ONE FROM SHORT TERM
LOSSES OCUCCURING DUE TO
MARKET FLUCTUATIONS.
 2. INVESTMENT
OBJECTIVE

 A PERSON NEARING RETIREMENT

WOULD LIKE TO HAVE A REGULAR
INCOME FROM INVESTMENT, WHILE
PRESERVING THE CAPITAL VALUE.
HENCE, WOULD CHOOSE A SAFER
PORTFOLIO FOR INCOME AND
STABILITY.
• GROWTH ALONGWITH
PRESERVATION OF CAPITAL VALUE
INVESTING FOR A GOAL CHILD’S
EDUCATION, CAN TAKE SOME MORE
RISK IN ANTICIPATION OF HIGHER
RETURN BUT NOT AT SUCH A HIGH
RISK THAT MIGHT ERODE HIS
CAPITAL.
• HIGH GROWTH AND INVESTING FOR
A GOAL THAT IS NOT VERY
IMPORTANT THEN ONE CAN
 3. TIME HORIZON
• FOR WHICH ONE CAN HOLD AN ITIME
NVESTMENT

• ALSO IMPACT THE LEVEL OR RISK

• IF IT’S A LONG TIME GOAL ONE CAN

PERSUE HIGHER RETURN BY
INVESTING IN A MORE RISKY
PORTFOLIO AS OVER THE PERIOD OF
TIME THE RISK REDUCES.
 PRINCIPLE

LONGER THE INVESTMENT PERIOD

LOWER THE RISK, SHORTER THE
INVESTMENT PERIOD HIGHER THE RISK.

• NEVER BORROW THE FUND FOR

INVESTMENT
• NEVER INVEST IN HIGHLY SPECULATIVE
STOCKS
• DEFENSIVE SECTORS ARE GOOD FOR
PORTFOLIO MANAGEMENT.
 INSTITUTIONS
GOAL SHOULD BE DETERMINED IN
TERMS OF THE ASSETS REQUIRED TO
BE ACCUMULATED BY THE END OF THE
INVESTMENT PERIOD.

IF GOAL NETWORTH OR SURPLUS OF

THE ASSETS OVER LIABILITIES
(INSTITUTIONAL INVESTOR), GOAL
SHOULD BE IN TERMS OF SURPLUS.

HAVING UNDERSTOOD RISK

TOLERANCE OF THE INVESTOR AND
CURRENT AVAILABLE ASSETS AND NET
 SECOND APPROACH
• ANALYSIS OF INVESTMENT
• OPPORTUNITIES OF CAPITAL MARKET
• STUDY THE CURRENT STATE OF THE
CAPITAL MARKET
• CURRENT LEVELS OF STOCK & BOND
INDICES
• HISTORICAL CHANGES
• INFLATIN PROJECTIONS
• REAL ESTATE VALUES

IT WILL HELP IN ESTIMATING THE RETURNS

AND CORRELATINS AMONG THEIR RETURNS
 TYPES OF ASSETS
ALLOCATIONS

• STRATEGIC ASSET ALLOCATION

• TACTICALO ASSET ALLOCATION

 1. STRATEGIC ASSET
ALLOCATION
STRATEGIC ASSET ALLOCATION IS A
DIVERSIFICATION METHOD THAT ESTABLISHES
AND ADHERES TO A “BASE POLICY MIX’.

SCIENTIFICALLY DIVERSIFYING ALLOCATION IN

ORDER TO OBTAIN MOST EFFICIENT RISK
RETURN COMBINATION IN THE FORM OF THE
BEST BASE POLICY MIX.

IT’S A LONG RUN CAPITAL MARKET

PREDICTION

NOTE:
DIVERSIFYING ASSETS IS THE KEY TO
SRAY WEALTHY.
THIS PROPORTIONAL COMBINATION OF ASSETS BASED ON
EXPECTED RATES OF RETURN FROM EACH ASSET CLASS.

EXAMPLE:

STOCKS - 10% RETURN PER YEAR

BONDS - 5% RETURN PER YEAR

A 50 : 50 MIX OF BONDS AND STOCKS WOULD BE

EXPECTED TO RETURN

7.5% PER YEAR.

POLICY ASSET ALLOCATION (LONG RUN
CAPITAL MARKET PREDICTION)

ANALYSIS OF RETURN

PROCESS IS CARRIED OUT AT REGULAR

TIME GAP (ONCE IN THREE YEAR).

PORTFOLIO CONSISTS OF STOCKS &

BONDS.
 INDIVIDUAL

OUTCOME MATURITY ON RETIRMENT

OR

VALUE OF SAVINGS AFTER 5 YEARS

OR 10 YEARS.
 INSTITUTIONAL
SURPLUS LIKELY TO BE ACHIEVED
AFTER YEARS.

OR

REQUIRED PENSION CONTRIBUTION

IN THE NEXT 5 YEARS.
CONSTANT ASSET MIX
STRATEGY
INVESTOR IS ASKED TO LOOK
RANAGE OF OUTCOME AND SELECT
THE PREFERRED ONE.

IN SUCH ANALYSIS
EACH ASSET MIX IS EXPRESSED IN
TERMS OF
TOTAL AMOUNT INVESTED IN EACH
ASSET CLASS.
 LONG RUN CAPITAL
CONDITIONS
• ASSETSEXPECTED RETURNS RISK
AND CORRELATIONS REMAIN
CONSTANT THROUGH OUT THE
STIMULATION PROCESS.

• THE MIX OF ASSETS IS HELD

CONSTANT OVER THE PERIOD OF
TIME. HOWEVER, THE STRATEGY IS
NOT SYNONYMOUS WITH THE BUY
AND HOLD STRATEGY.
 2. TACTICAL ASSET
ALLOCATION

OVER THE LONG RUN, A STRATEGIC

ASSET ALLOCATION STRATEGY MAY
SEEM RELATIVELY RIGID. IT MAY
THEREFORE, BE NECESSARY TO
ENGAGE IN SHORT TERM, TECTICAL
DEVIATIONS FROM MIX IN ORDER TO
CAPITALISE ON UNUSUAL SITUATION.
SUPPOSE YOU EXPECT RBI TO
INCREASE INTEREST RATES. YOU
WOULD WANT TO SELL YOUR BOND
PORTFOLIO, AS RISE IN INTEREST
RATES COULD LEAD TO FALL IN
BOND PRICES.

YOU MAY USE THAT MONEY TO BUY

MORE SHARES OR HOLD CASH TO
BUY SHARES AT A LATER DATE.
ALTERNATIVELY, YOU MAY EXPECT
TO DECLINE THE STOCK MARKET
SHARPLY, YOU MAY BOOK PROFITS
AND MOVE INTO FIXED INCOME
SECURITIES. LIKE IN PRESENT
SITUATION.

THIS PROCESS OF FEQUENTLY

MOVING MONEY BETWEEN ASSET
CLASS IS CALLED TACTICAL ASSET
 IT REQUIRES:

 MARKET TIMING SKILLS

 RETURNS WILL DEPEND ON SHIFTING

FROM ONE ASSET CLASS TO
ANOTHER AT THE RIGHT TIME.
 TACTCAL ASSET
• TACTCAL ASSET ALLOCATION IS
AMIMED AT BENEFITING FROM THE
SHORT TERM UNDER PRICING OF
ASSETS.

• IT IS PERFORMED ON A ROUTINE BASIS

AS A PART OF THE ACTIVE
MANAGEMENT AND IT INVOLVES
SWITCHING FUNDS BETWEEN EQUITY,
BONDS AND CASH AND IGNORES THE
CHANGE IN THE RISK TOLERANCE
• INVESTOR PSYCOLOGY AND MARKET FORCES CAN
LEAD TO PREIOD OF MISEVALUATION. A
TECHNICAL ALLOCATION PROCESS ATTEMPTS TO
CAPTURE THESE MISEVALUATION.

• IN PRESENT SITUATION BEAR ANDBULL TRYING

TO DOMINATE EACH OTHER.
• NEEDS TO BE FLEXIBLE TO AVAIL ADVANTAGE OF
SHORT TERM OPPORTUNITIES.
• ALLOWING YOU TO PARTICIPATE IN ECONOMIC
CONDITIONS.
 CONSTANT – WEIGHTAGE
ALLOCATION:
• IF ONE ASSET WERE DECLINING IN VALUE, YOU
WOULD PURCHASE MORE OF THAT ASSET, AND IF
THAT ASSET VALUE INCREASE, YOU WOULD SELL
IT.

• NO HARD AND FAST RULE FOR TIMING OF

PORTFOLIO REBALANCING UNDER STRATEGIV OR
CONSTANT WEIGHTING ASSET ALLOCATION.

• HOWEVER, A COMMON RULE OF THUMB IS THAT

THE PORTFOLIO SHOULD BE REBALANCED TO ITS
ORIGINAL MIX WHEN ANY GIVEN ASSET CLASS
MOVES MORE THAN 5% FROM ITS ORIGINAL
VALUE.
CONSTANT ASSET MIX
STRATEGY:

STRATEGY IN WHICH THE MIX OF THE

ASSETS IS HELD CONSTANT OVER A
PERIOD OF TIME.

IT HAS NOTHING TO DO WITH BUY

AND HOLD STRATEGY.
 DYNAMIC ASSET
ALLOCATION
RELATED TO RISE AND FALL OF
MARKETS DEPENDS ON STRONG AND
WEAK ECONOMY.

IF MARKET IS SHOWING WEAKNESS,

YOU SELL STOCKS IN ANTICIPATION OF
FURTHER DECREASE.

IF MARKET IS STRONG, YOU PURCHASE

STOCKS IN ANTICIPATION OF
 INSURED ASSET
ALLOCATION
IT IS AIMED AT ACHIEVING THE
OBJECTIVES OF INVESTOR
WITHOUTDEPENDING ON MARKET
TIMINGS, UNLIKE TACTICAL ASSET
ALOCATION.
• MORE SUITABLE TO LONG TERM
INVESTORS
• INSURED ASSET ALLOCATIN SWITCHES
MAINLY BETWEEN STOCKS AND
TSREASURY BILLS
• BASICALLY THIS STRATEGY IS BASED
ON THE ASSUMPTIONS THAT EXPECTED
RETURNS, RISKS AND CORRELATIONS
 100 MINUS YOUR AGE
METHOD:
PERCENTAGE OF YOUR TOTAL INVESTMENT THAT
CAN BE INVESTED IN EQUITIES DEPENDS ON
YOUR AGE AND IS BASED ON THE PRESSUMPTION
THAT YOU WILL LIVE UP TO 100 YEARS.

• INVESTMENTS TO BE PLACED IN EQUITIES 100

MINUS YOUR AGE.

• REST MAYBE PLACED IN BOND AND OTHER SAFE

INVESTMENTS.
YOUR AGE 100 MINUS % % %
YOUR AGE INVESTME INVESTME INVESTME
NT IN NT IN NT IN FDS
30 70 EQUITIES
70 BONDS
30

40 60 60 40

50 50 50 50

60 40 40 60

70 30 20 70
 ASSET ALLOCATION IS NOT A ONE –
TIME

PROCESS; RATHER IT MUST BE

PURSUED ON

AN ONGOING BASIS.
 CHANGES IN MARKET
CONDITIONS:
IT ACTUALY REACTS TO THE
CHANGES IN THE PREDICTED
CAPTIAL MARKET CONDITIONS
RATHER THANT HE VARIATIONS
IN INVESTOR RISK TOLERANCE.
ASSET ALLOCATION
MANAGEMENT STYLE:

 MULTIPLE FUNDS
 NUMBER OF SECURITIES
• EXPOSURE OF EACH ASSET CLAS S
RELATES TO MOVEMENTS IN THEIR
RETURNS.

• IT ALSO HELPS IN DETERMINING

THEFUND MANAGERS
PERFORMANCE.
 STYLE OF ANALYSIS
• USE OF QUADRATIC PROGRAMMING
FOR THE PURPOSE OF DETERMINING
A FUND’S EXPOSURE TO
THECHANGES IN RETURNS OF THE
ASSET CLASSES.

• SELECTING A STYLE THAT MINIMIZES

THE VARIANCE OF THE
DIFFERERENCE BETWEEN THE
RETURN OF THE FUND AND THE
PASSIVE
 RAPIDLY CHANGING MARKET
CONDITIONS
• PREDICT PRESENT AND FUTURE
MARKET CONDITIONS
• SPECIFIED FLOOR VALUE
• RISKY ASSETS CAN BE SOLD AT THE
APPROPRIATE TIME WHEN THEPRICE
OF ASSET FALLS
• SELL MORE RISKY STOCKS
 OTHER POPULAR
APPROACH
CASHFLOW NEEDS METHOD
• PROJECTING CASH FLOW OF THE
FUTURE AND ESTIMATING THE DEFICIT,
IF ANY.
• INVESTMENT WILL THEN FILL IN THE
DEFICIT.
• THE SOURCES OF INCOME MAY BE
WAGES & SALARY
• PENSION PAYMENTS
• INTEREST & DIVIDEND INCOME ON
INVESTMENTS ALREADY MADE
• RENTAL IONCOME FROM PROPERTIES
• SALE PROCEEDS OF PROPERTIES
 RISK TOLERANCE
METHOD
• RISK REVERSE PERSONWIL INVEST
AL OR MOST OF STHE FUND IN LOW
RISK INVESTMENTS.

• A RISK LOVER MAY INVEST IN HIGH

RISK INSTRUMENTS.
 100 COMMON STOCKS FOR
LONG RUN
• LONG TERM INVESTMENTS

• ENTIRE FUND IS INVESTED IN EQUITY

STOCKS

• WHENSTOCKS MARKETS ARE ON A

HIGH AND FALLS IN POPULARITY
ALONGWITH THE MARKETS

• THERE IS NO OTHER BASIS SCIENTIFIC

OR OTHERWISE, FOR IT.