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Principles of Asset Allocation. Importance of Asset Allocation Source: Brinson, Beebower and Singer.

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Presentation on theme: "Principles of Asset Allocation. Importance of Asset Allocation Source: Brinson, Beebower and Singer."— Presentation transcript:

1 Principles of Asset Allocation

2 Importance of Asset Allocation Source: Brinson, Beebower and Singer

3 Three Components in Determining Allocation of Assets Component #1 Asset Class Rates of Return

4 Asset Class Relationship Volatility Specialty Stocks Small Cap Stock Mid Cap Stock Foreign Stock Large Cap Stock Specialty Bonds Corporate Bonds Government Bonds Foreign Bonds Real Estate Commodities

5 Cumulative Long-term Returns 75 Years Source: Ibbotson Associates

6 Short-Term (1-Year) Returns Source: Ibbotson Associates

7 Three Components in Determining Allocation of Assets Component #2 Asset Class Volatility [Standard Deviation]

8 Distribution of Returns by Asset Class Source: Ibbotson Associates

9 Reduction of Risk Over Time One Year Holding Period Five Year Holding Period Ten Year Holding Period Twenty Year Holding Period Source: Ibbotson Associates

10 Three Components in Determining Allocation of Assets Component #3 Relative Volatility of the Asset Classes [Correlation]

11 Correlations Positive CorrelationNegative Correlation

12 Correlations of Asset Classes Source: Ibbotson Associates

13 Putting It All Together Minimize volatility by combining different classes of assets

14 Diversifying Risk 100% Stocks 80% Stocks/ 20% Bonds 60% Stocks/ 40% Bonds 40% Stocks/ 60% Bonds 50% Stocks/ 50% Bonds 20% Stocks/ 80% Bonds 100% Bonds

15 Diversifying Risk Stocks and Bonds Adds Real Estate and Commodities

16 Importance of Asset Allocation Source: Brinson, Beebower and Singer


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