Ch 18 - ASSET ALLOCATION Flashcards
3 STEPS OF ASSET ALLOCATION PROCESS (1 is optional)
1- determine strategic asset alllocation
2- rebalance portfolio
3- optional (tactical asset allocation strategy)
4 assets to consider when allocating assets
- Classification of assets
- Selection of asset classes
- Location of assets
- Costs of rebalancing and trading
in which type should debt securities be held? why?
non-taxable accounts because interest is taxed higher than cap gains
in which type should equity securities be held?
taxable accounts because cap gains are taxed at a lower rate.
two factors to consider in strategic asset allocation
- The client’s investment objectives
* Capital market expectations
three methods to design a Stategic Asset Allocation
- Mean-variance optimization
- Rules of thumb
- The ad hoc approach
four stages to Life Cycle Approach
- Early earning years (to age 35)
- Mid-earning years (age 35 to 55)
- Peak earning years (age 55 to retirement)
- Retirement years
AGE APPROACH to strategic asset allocation
100-client age is allocated ton equities
corridor width
trading band within which the market value of each asset class can fluctuate without having to be rebalanced
four factors to determine corridor width
- Transaction costs
- Tolerance for tracking risk
- Correlation with other asset classes
- Volatility
4 BENEFITS OF A REBALANCING STRATEGY
- Risk reduction
- Performance improvement
- Discipline
- Simplified investment process
Factors assessed to determine attractiveness of asset class
- direction and level of interest rates anticipated inflation
- earnings outlook
- market valuations
- asset class risk premiums.
2 DIFFERENT APPROACHES TO tactical asset allocation
- valuation-based
* cyclical-based
Factors that influence and reflect
economic and business cycles
- The shape of the yield curve
- Monetary and fiscal policy
- Taxation policy and levels
- Inflation
- Corporate profits
- Market valuations
