Chapter 5 Asset Allocation process

1. investment universe , targets and restriction

2. return and risk estimates

3. portfolio construction

4. implementation

5. risk and return gap analysis

6. rebalancing

• bond

• equities

• commodities

• nfts

• wealth protection

• long term wealth increase

• regular income stream

• index linked performance

• absolute performace after tax

• limitis in portfolio weightings

• limits on risk characteristics

• many investors have restircition in their asset allocation ( Versicherung ampega 90% Anleihen Geschäft)

• market outlook ( economic scenarios, infaltion, interest rates)

• Quantifiying risk ( volatility, correlation)

• Optimaziation of asset classes due to diversification of the asset classes

• inclusion of various countries and regions

• inclusion of various currencies

• Timing is everything

• dont buy to high

• Use performance measurement and performance attribution on exisiting investments

• detect new asset classes or opportunities

• a portfolio can change over time

• changes of the value of the portfolio

• changes in market outlook

• changes in benchmark

—> Your task is to see the dynamic changes and rebalnce the portfolio

1. first step is to breakdown the the portfolio into asset classes

   • equities, bond, money market

   • countries

   • currencies

2. then you have to take into account the longer horizon of the investement

3. it takes place at the entire market

• more granular breakdown of the portfolio

• for equities it is in sectors and individual equities

• for bonds it is in segments, debtors, issuer groups and maturities

• because things are seen differently in different countries the correlation can be 0 or Co<0

• furhter diversifiaction effect can be achieved

• therefore the risk can be reduced and the return can be evaluated

• Yes because hedging the currency risk is hedging the cost of the investment

• Two reason for that

  • transaction cost differentiate

  • interest differentiate

  • used as a diversifier

• Volatilities of the investements

• volatilites of the individual exchange rates

• Correlation of the individual investements

• Correlation between the foreign currencies

• Correlation of exchange markets

• the expected return and risk should be known to value the the assets

• extrapolating the historic data in the future

• subjective assessment and forecasting

• Correlations are relativly stable over time but can change in times of crisis. Therefore a stress test is needed

• The volatilities can be from the options prices which means that quick return expectations adjustments can be carried out

• You should at least have 1 million euro in it to diversify it properly

• a good mix of naive diversification and stock picking/ Maybe value companies or dividenaristokrates

• You can eliminate currency risk by diversify or through hedging insturements like options and futures

• returns are considered after transactions costs

• taxes can only ruoghly implemented because the hight depends on the investment success/ the personal tax burden/ the country you are resident

• it is important for the investor to know the real net return minus the inflation

• the inflation issue only plays a role in regions with a high inflation over time

• institutional investors have legal restrictions on what they can do or not do for example max amount of equities, bonds etc.

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• goal is to achieve a good purchase price (buy low) and an excellent sell price (sell high)

• part of active management strategies

• especially usefull with products with high fluctuations (growth equities)

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• dynamic process

• regula, ad hoc verification of the assumptions and forecast

• economic fundamentat data change over time

• the amount of the invested capital is not consistent

• the targets of the investor can change