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