Asset Allocation Portfolio Management What is Asset Allocation

Asset Allocation Portfolio Management

What is Asset Allocation (AA)? n Asset allocation is the practice of diversifying the portfolio between different asset classes and / or products. n Each asset class reflects peculiar characteristics, risk- return profile not being shared by others. n Asset allocation can be decided to … n Achieve some objective n Match investor’s profile

Asset Allocation idea/ need – n The performance of assets may vary from year to year and is not easily predictable. n Mixture of assets is more likely to meet the goals. n Fundamental idea: different asset classes offering non- correlated returns (or inversely correlated) can be pooled together in a portfolio for diversification … n Good Asset Allocation would reduce risks and variability of expected returns. n Asset Allocation becomes ineffective if done within similar or correlated asset classes.

How to decide Asset Allocation? Asset Allocation depends upon the return that an investor is looking at…. n If your Investor is targeting a return of 10 % what you will Suggest? I will suggest him an Asset Allocation – Equity 50% Return @ 15 % Debt 50% 7. 5% 2. 5% Return @ 5 % 10%

Asset Allocation – Benefits Asset allocation is the primary/ main determinant of long-term portfolio performance rather than superior product selection or market timing Asset allocation is a key factor in determining the success of an investment strategy. According to a widely recognized financial study by Brinson, Singer & Beebower, published in the Financial Analyst's Journal in 1995, asset allocation can account for up to 93. 6% of portfolio performance.

Impact on Return in Long Term Focus on Asset Allocation Size Timing Sector Selection Stock Selection Style Timing Market Timing Probability of Success

Asset Classes Broad Classes Growth Income Preservation Equities Bonds Cash Real Estate FIS / Mortgages Gold Equities Market Cap Style Origin Large Cap Growth Domestic Mid Cap Value International Small Cap Blend

Asset Allocation => Risk Profile Asset Allocation as per Profile * Equity Debt Cash Aggressive 75% 20% 5% Moderate 55% 40% 5% Cautious 35% 60% 5% Conservative 20% 75% 5% * For Illustrative purpose only.