Asset Allocation Flashcards
4 steps in asset allocation
define the opportunity set
specify capital market expectations
derive efficient frontier of risky assets
use IPs to arrive at asset allocation deicions
what are capital market expectations
expected risk
expected return
how they co vary
what is IPS
investment policies statement
what is strategic asset allocation
allocation between asset classes (cash, equities, bonds, alternatives)
factors to consider is strategic asset allocation
corporate vs government bonds
domestic vs international
investment grade v non investment grade
what model can be used for asset allocation
markowitz model
what does the markowitx model tell us
correlation between asset classes
adding alternative investments to a portfolio can reduce its risk
does strategic asset allocation focus more on systematic or non systematic risk
systematic
what is tactical asset allocation
taking views and positions on entire asset classes
intent on adding value based on forecasts of near term returns
active investing - trading in and out of different markets based on market conditions
why is active investing not just stock picking individual assets
it is also showing up to AGMs etc
what is tactical asset allocation also called
security selection
examples of how financial markets provide an informational role
share prices go up - why? must be for good reason
what do short sellers know that we don’t
otherwise no fraud would be spot
share prices reflect the value of the compan
when does markowitx model let us down
large number of asset classes
requires huge number of estimated for covariance matrix
doesn’t provide any guidance to forecasting the risk permia to construct the efficient frontier
what are return generating models used for
to estimate future returns
benefit of return generating model
needs less estimates so less chance of estimation error
