CFP- Level-1-IP and Asset Management (Global) Chapter 1-6

Benchmark Construction and Comparisons In addition to comparing returns of potential holdings against one another, or how they performed on a risk-adjusted basis, investors also commonly want to know how their investments performed relative to the market. Performance evaluation of a fund or manager looks not only at the absolute returns the returns relative to a benchmark. As we saw previously, performance in excess of a benchmark or required rate of return is alpha. Another important aspect to pay attention to is the method used to weight the securities that make up a given index. While there are variations on the calculation of weighting methods, the three most common methods are by market capitalization, price, or equal weighting. Friday, 15 July 2022 Investment Planning & Asset Management

Benchmark Construction and Comparisons Market Capitalization (Value) Weighted Index In a market capitalization-weighted or cap-weighted index, each security is maintained in the index at a percentage weighting equal to the percentage capitalization (total # shares outstanding x current price per share) that it represents of the index’s total market capitalization. Price Weighted Index As the name indicates, in a price weighted index, the current market price of a company’s stock, not its market capitalization, determines how much of the index a single security accounts for. The higher a security’s price, the more impact it has on the price of the index, regardless of its total market value. Equally Weighted Index Equally weighted indexes give equal rating to all the components of an index, regardless of the current stock price or total market capitalization. In an equally weighted index, it is the percentage change in price of each component that is aggregated to determine the index’s current price/value. Friday, 15 July 2022 Investment Planning & Asset Management

The performance evaluation process includes four stages. 1. Measuring absolute returns Absolute returns are the returns achieved over a certain time period. 2. Adjusting return for risk Investors prefer higher returns, but lower risk. 3. Measuring relative returns By measuring relative to a benchmark investors can assess performance of a fund or manager. 4. Attributing performance Determine how much of performance is the result of the selection of asset classes, sectors, individual securities, and currencies. Friday, 15 July 2022 Investment Planning & Asset Management

Fundamental Analysis Fundamental analysis involves the examination of financial fundamentals (sales, earnings, net income, etc.) to attempt to predict the future performance of a company. It includes analyzing and interpreting various financial statements and the outcomes of decisions made. Fundamental analysis involves the formulation of forecasts to estimate the intrinsic value. Buy and sell decisions are made on whether the current market price is less than or greater than the estimated intrinsic value Friday, 15 July 2022 Investment Planning & Asset Management

Fundamental Analysis In the top-down method, an investor tries to identify broad economic trends and then selects industries and companies that should prosper from a given trend. 1. The economy: Especially in the three areas listed below: A. Business cycles: Long-term business cycles tend to go through four phases: 1. Expansion or recovery 2. Peak 3. Contraction or recession (or even depression if the cycle drops low enough) 4. Trough B. Central bank monetary policy: Policy loosens during periods of recession to spur growth (i.e., the growth rate in the money supply expands), while policy tightens during periods of growth to combat inflation (i.e., the growth rate in the money supply contracts). The most commonly used tool of central banks to alter monetary policy is changing the rate at which banks borrow reserves from each other C. Fiscal policy: This refers to whether the government is increasing or decreasing spending and/or whether the government is increasing or decreasing taxes. Friday, 15 July 2022 Investment Planning & Asset Management

Fundamental Analysis 2. The industry: To determine which industries are likely to do well during the current economic environment; the three basic types of industrial classifications exist: A. Defensive: Those companies that are least affected by business cycles, usually firms producing nondurable consumer goods (e.g., utilities, beverage companies, grocery chains, etc.). B. Cyclical: Very vulnerable to business cycles (opposite of defensive), usually firms producing durable goods (e.g., heavy equipment, capital goods, raw materials, etc.). C. Growth: Firms growing faster than the economy because of product developments or technological changes. Friday, 15 July 2022 Investment Planning & Asset Management

Fundamental Analysis 3. The company: To determine which companies within selected industries offer the best investment opportunities, companies are primarily evaluated in four areas: A. Competitive position B. Prospects for growth and stability C. Management ability and integrity D. Current financial position (evaluating financial statements using ratio analysis) Friday, 15 July 2022 Investment Planning & Asset Management

Fundamental Analysis Bottom-Up Analysis Bottom-up investing takes a micro approach. A bottom-up analyst concentrates on the company’s fundamentals and gives secondary or little attention to analyzing the industry or economy. The idea is that stock pickers can find companies that will do well over time on their own merits, unaffected by market or industry trends. The goal of a bottom-up analysis is to gain a detailed understanding of the company itself, including its products, services and management approach. Friday, 15 July 2022 Investment Planning & Asset Management

Technical Analysis Technical analysis focuses on the analysis of the patterns and direction in price movement of a company’s stock, rather than on the fundamental information about the company itself. We could best describe technical analysis by saying, “the trend is your friend.” This means technicians chart price movements, volume data, and changes of direction in both, to learn something about the future direction of the market and individual securities. Friday, 15 July 2022 Investment Planning & Asset Management

Technical Analysis Technicians use charts to do their analysis. These charts can, and do, show many aspects of market activity, but regardless of the chart, technicians usually ask four questions: 1. What is the overall trend? This involves analysis of moving averages over select periods of time (e.g., 50 days, 200 days, etc.) to determine the direction (e.g., up, down or sideways) of the trend. Movement above the trend line is generally considered positive (i.e., bullish), while movement below is considered negative (i.e., bearish). 2. Is there a support level? Support levels are areas where prices are clustered below the current price level. A drop below support indicates a bearish move. Friday, 15 July 2022 Investment Planning & Asset Management

Technical Analysis 3. Conversely, is there a resistance level? Whereas support is at the bottom of a trend line, resistance is at the top (think “floor” and “ceiling”). Resistance reflects the stock’s price hitting a level, but not going higher. A break through resistance (to the topside) is considered bullish. 4. What is the momentum, or what is the trend? This is a look at a recent series of price movements (i.e., moving averages) to see whether they are trending up, down or sideways. Momentum also looks at trading volume to determine the rate of change. A bullish trend occurs when a short-term trend line passes above a long-term line, especially with good volume (and bearish in the reverse). Friday, 15 July 2022 Investment Planning & Asset Management

Technical Analysis: Price and Volume-Based Rules Technical analysts also use price and volume trends to establish trading rules and strategies, such as: 1. Moving averages 2. Charting 3. Support and Resistance Levels 4. Relative Strength Friday, 15 July 2022 Investment Planning & Asset Management

Contrarian Investing Rules/Strategies Investors who identify themselves as contrarians believe that most investors are incorrect in their investment decisions, and will therefore take investment action that is opposite of what the majority is doing. Some of the technical trading rules used by contrarians include: 1. Odd-lot theory 2. Cash positions in mutual funds 3. Put/Call ratio 4. Short interest 5. 200-day moving average 6. Advance/decline line Friday, 15 July 2022 Investment Planning & Asset Management

• Thank You all • Chapter 4 completes here Friday, 15 July 2022 Investment Planning & Asset Management

Chapter-5- Investment Theory Friday, 15 July 2022 Investment Planning & Asset Management

Modern Portfolio Theory (MPT) • Modern Portfolio Theory (MPT) argues that it's possible to design an ideal portfolio that will provide the investor maximum returns by taking on the optimal amount of risk. • MPT was developed by economist Harry Markowitz in the 1950s; his theories surround the importance of portfolios, risk, diversification and the connections between different kinds of securities. • In particular, MPT advocates diversification of securities and asset classes or the benefits of not putting all your eggs in one basket. • MPT says stocks face both systematic risk—market risks such as interest rates and recessions—as well as unsystematic risk—issues that are specific to each stock, such as management changes or poor sales. • Proper diversification of a portfolio can't prevent systematic risk, but it can reduce if not completely eliminate, unsystematic risk. Friday, 15 July 2022 Investment Planning & Asset Management

Assumptions of MPT • Investors are rational, and want to realize the best possible return (satisfaction) on their investments. • Investors prefer the lowest level of risk, and for a given level of risk, want the maximum possible return. • When making decisions, investors consider only risk and return. • Risk is represented by standard deviation (variance). • Expected return, risk and covariance are fixed through time, and known to investors. • Investors have full access to all relevant investment information. • An investor cannot manipulate, or take advantage of, the market, because it is perfectly competitive Friday, 15 July 2022 Investment Planning & Asset Management

Efficient Frontier and Optimal Portfolios One of MPT’s assumptions is that investors are looking for the highest reasonable return for a given level of risk. In MPT, a limited number of combinations occur that maximize return for a given risk level. If we charted the line (a parabola) for these optimal risk- return combinations, we would have what MPT calls the efficient frontier. As a simple way to understand the efficient frontier, we can say that no portfolio could achieve a higher return without taking on more risk Friday, 15 July 2022 Investment Planning & Asset Management

Investment Theory Efficient Frontier and Optimal Portfolios Friday, 15 July 2022 Investment Planning & Asset Management

Efficient Portfolio for a Two securities case • Let us understand various combinations of Weights of 2 securities A & B Security A Security B Expected Return 12% 20% Standard Deviation of 20% 40% Return Coefficient of -0.20 correlation • The investor can combine securities A and B in a portfolio in a number of ways by simply changing the proportion of funds allocated to them. Friday, 15 July 2022 Investment Planning & Asset Management

Let us see some combinations of different weights Portfolio Proportion of A Proportion of B Expected Standard W A W B Return E(R P) Deviation (σp) 1 (A) 2 1.00 0.00 12% 20% 3 0.90 0.10 12.80% 17.64% 4 0.759 0.241 13.93% 16.27% 5 0.50 0.50 16% 20.49% 6 (B) 0.25 0.75 18% 29.41% 0.00 1.00 20% 40% Friday, 15 July 2022 Investment Planning & Asset Management

Let us analyse various combinations • The benefit of diversification arises when the correlation between the 2 securities is less than 1 • Portfolio 3 represents the Minimum Variance Portfolio (MVP) or more accurately minimum standard deviation portfolio • The investor considering a portfolio of A and B faces an opportunity set or feasible set • Investor can choose an appropriate mix of portfolio Friday, 15 July 2022 Investment Planning & Asset Management

Efficient Frontier • The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. • Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. • Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return. • The efficient frontier comprises investment portfolios that offer the highest expected return for a specific level of risk. • Returns depend on which investments make up the portfolio. • The standard deviation of a security is synonymous with risk. Lower covariance between portfolio securities results in lower portfolio standard deviation. • Successful optimization of the return versus risk paradigm should place a portfolio along the efficient frontier line. • Optimal portfolios that comprise the efficient frontier usually exhibit a higher degree of diversification. Friday, 15 July 2022

Efficient Frontier • One assumption in investing is that a higher degree of risk means a higher potential return. Conversely, investors who take on a low degree of risk have a low potential return. According to Markowitz's theory, there is an optimal portfolio that could be designed with a perfect balance between risk and return. • The optimal portfolio does not simply include securities with the highest potential returns or low- risk securities. The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return. The points on the plot of risk versus expected returns where optimal portfolios lie are known as the efficient frontier. • Assume a risk-seeking investor uses the efficient frontier to select investments. The investor would select securities that lie on the right end of the efficient frontier. The right end of the efficient frontier includes securities that are expected to have a high degree of risk coupled with high potential returns, which is suitable for highly risk-tolerant investors. Conversely, securities that lie on the left end of the efficient frontier would be suitable for risk-averse investors. Friday, 15 July 2022

Optimal Portfolio • The two portfolios labeled on the efficient frontier line represent the maximum expected return for two given levels of risk. The investor cannot build an attainable portfolio above the line, and any portfolio below the line is not as efficient (e.g., the low risk portfolio shown). • Understand that neither efficient portfolio is technically better or more efficient than the other. Both are equally efficient. One maximizes return for one level of risk, while the other does the same for another level of risk. The inefficient portfolio shown in the graphic can be rebalanced so that it falls on the efficient frontier, thereby becoming a more effective portfolio. • How do we choose between efficient portfolios? Most investors desire to achieve the highest satisfaction (utility) from their portfolio. • This means there is no one perfect or best portfolio. Instead, each investor will find his or her optimal portfolio along the efficient frontier by determining the amount of risk to assume relative to the return the person needs or wants. • In this context, there may be more than one optimal portfolio for a given investor, depending on the goal(s) the investor has for the portfolio. A portfolio designed for a longer-term goal, such as greotairle, msuecnht,amsapyahyianvgefoardaiffcehreildn’tspeladcuecaatlioonngtuthiteione.fficient frontier than a portfolio targeted for a closer Friday, 15 July 2022 Investment Planning & Asset Management

Capital Asset Pricing Model • Was developed by William Sharpe (1964), John Lintner (1965) and Jan Mossin (1966). • Their work was based on the foundations of Modern Portfolio Management laid by Harry Markowitz in 1952. • CAPM predicts the relationship between the risk of an asset and its expected return. • It helps in the identification of different securities (individual asset or portfolio) as overpriced or underpriced by assigning values (not exact) to these securities. • This would help in selection of securities to be included in the portfolio by the risk-averse investors. • CAPM talks about the ex-ante returns (returns expected in future) from an asset. This return shall compensate the investors for the following two: • Time-premium • Risk-premium • CAPM is concerned with 2 key questions  Relationship between risk and return for an efficient portfolio  Relationship between risk and return for an individual security Friday, 15 July 2022 Investment Planning & Asset Management

CAPM -Assumptions: • The investors are risk averse i.e. they attempt to avoid risk. • Investors seek to maximize the expected utility of their portfolio over a single planning period horizon. • Each security in the market has only two attributes, on the basis of which these are selected in the portfolio. These are mean returns and variances of such returns representing the risk. • Investors have homogeneous expectations i.e. they have identical subjective estimates of means, variances and co-variances among returns. • The investors can borrow and lend freely at the riskless rate of interest. • The market is perfect, there are no taxes, there are no transaction costs, securities are completely divisible, and markets are competitive. • The quantity of risky securities in the market is given. Friday, 15 July 2022 Investment Planning & Asset Management

CAPM Using CAPM, an investment advisor can determine a required rate of return for any risky asset (as opposed to a riskless asset, e.g., Treasury bill). CAPM has two divisions, the broader version focusing on the overall capital market, called the capital market line (CML), and the narrower version focusing on individual securities, called the security market line (SML). Friday, 15 July 2022 Investment Planning & Asset Management

Formula for Capital Market Line • To compute Portfolio return using CML • rp = portfolio return • rm = market return • rf = risk-free rate • σp = standard deviation of the portfolio • σm = standard deviation of the market Friday, 15 July 2022

• Remember that beta is the covariance of a stock (or portfolio) as it relates to the stock market, and the beta coefficient is a measure of systematic risk. When we look at the security market line, we will be evaluating an asset against the total market, and assessing systematic risk. This requires the use of beta, which can be calculated with the following equation: • β = Rim X (σi / σm) • Where, • β = beta • Rim = correlation coefficient between market and asset • σi= standard deviation of the asset • σm= standard deviation of the market Friday, 15 July 2022

Formula of Security Market Line • To calculate the investor’s required return, start with the risk-free rate. Add to this the relevant risk premium to arrive at the return required for the investor to accept a given amount of risk. The formula for doing this is: • R = Rf + β (Rm – Rf) • Where, • R = required rate of return • Rf = risk-free rate • Rm = market rate • This formula is also known as the capital asset pricing model (CAPM). We can work a sample calculation to determine the required/expected returns. Friday, 15 July 2022

Capital Market Theory • Calculations based on SML incorporate beta calculations • If required return (from SML) > estimated return, then security is overpriced (negative Alpha) • If required return (from SML) < estimated return, then security is underpriced (positive Alpha) Friday, 15 July 2022 Investment Planning & Asset Management

Capital Market Theory Expected (required) return ER i   RFR  i R M  RFR  where E(Ri) = expected rate of return of security I RFR = risk-free rate of return βi = beta of security i RM = expected return of the market portfolio (Don’t confuse with excess market return which is the expected return of the market portfolio – the risk-free rate of return) • ExamplEEe:((RRif Rii ))F==R =R3F.7R5%+, ββi =i (1R.2M6,-aRndFRRM )= 6.50%, then 3.75 + 1.26(6.50 - 3.75) = 3.75 + 3.465 = 7.215 • Thus, if an analyst estimated a 10% return for the security, there would be an excessive return, or Alpha, of 2.785% (10.0% - 7.215%). Investment Planning & Asset Management Friday, 15 July 2022

Capital Market Theory Assume: RFR = 3.75 and RM = 6.50% Stock Beta Estimated return Expected Estimate Evaluation A 1.55 7.25 return minus Overvalued (SML) Undervalued expected Fair value 8.01 -0.76 B 0.95 8.56 6.36 2.20 C 2.15 9.66 9.66 0.00 Friday, 15 July 2022 Investment Planning & Asset Management

Fair value stocks will lie on the SML. Overvalued stocks will lie below SML, while undervalued stocks will lie above the SML. E(R) Stock C: SML fair value Security Market Line Stock B: undervalued Risk Stock A: β free overvalued rate Investment Planning & Asset Management Friday, 15 July 2022

Capital Market Theory 1. Construct the Policy Statement • Focus on investor’s short-term and long-term needs, familiarity with capital market history, and expectations. Investor returns are expressed in terms of both risk and return. 2. Examine current and projected financial, economic, political, and social conditions to determine investment strategy • Focus on short-term and intermediate-term expected conditions to use in constructing a specific portfolio 3. Implement the plan by constructing the portfolio • Focus on meeting the investor’s needs at minimum risk levels • Continually monitor and update investors’ needs, environmental conditions, evaluate portfolio performance, and rebalance as needed

Capital Market Theory • Objectives cannot be expressed solely in terms of return • Investors may be ignorant of the investment risks of any investment strategy • First formulate risk tolerance to eliminate inappropriate investments • There are two objectives: • Return: in the form of: • capital preservation • capital appreciation and/or income • Risk: depends on ability and willingness to accept uncertainty, losses Friday, 15 July 2022 Investment Planning & Asset Management

Investment Theory Capital Asset Pricing Model (CAPM) Example: Assumption: Rf = 7% E(Rm) = 15%. An analyst has forecast the following for three stocks: Stock Beginning Price Expected Price Dividend Beta Today in 1 Year Expected in 1 Year A 50 54 2.00 1.0 B 80 90 4.00 0.8 C 30 34 1.00 1.2 Stock Forecast Return Required Return ������ = ������������ + ������ ������������ − ������������ A (Expected Price – Beginning Price + Dividend B Expected)/Beginning Price 0.07+1.0(0.15-0.07) = 15.0% C 0.07+0.8(0.15-0.07) = 13.4% (54-50+2)/50 = 12.0% 0.07+1.2(0.15-0.07) = 16.7% (90-80+4)/80 = 17.5% (34-30+1)/30 = 16.7% Stock Forecast Return Required Return A 12.0% < 15% B 17.5% > 13.4% C 16.7% = 16.7% Calculate the required rate of return using the Capital Asset Pricing Model (CAPM) Investment Planning & Asset Management Friday, 15 July 2022

Investment Theory Efficient Market Hypothesis (EMH) Fama, in his Ph.D. dissertation, stated that at any given time and in a liquid market, security prices fully reflect all available information. Fama’s hypothesis is known as the efficient market hypothesis (EMH). As this hypothesis evolved, Fama said that, to test its validity, EMH could be divided into three forms: 1. Weak: Assumes that current stock prices reflect all available (current and historical) stock market information. Under the weak form of the EMH, past price and volume data of a stock have no impact on the future direction of the stock’s price. If the weak form is true, it follows that technical analysis is not beneficial, since it adds no predictive value. 2. Semi-Strong: Assumes that new information available to the public is immediately factored into stock prices, and can be used by investors. The market then regains equilibrium. If true, the semi-strong form effectively discounts fundamental analysis. 3. Strong: Assumes current stock prices fully reflect all public and nonpublic (including insider) information (i.e., a perfect market). That information is available to all investors; therefore, one cannot use such information to consistently achieve excess returns. Friday, 15 July 2022 Investment Planning & Asset Management

MPT and CAPM • Modern portfolio theory and the capital asset pricing model are fundamental risk/reward and asset pricing tools. • They form the foundation of much of the thinking and practice surrounding current investment management. • Some people believe MPT and CAPM are no longer useful, or at least less useful than they once were. • If MPT and CAPM were 100% true and applicable 100% of the time in all global markets, there would be little, if any, reason for other pricing models. Friday, 15 July 2022 Investment Planning & Asset Management

Arbitrage Pricing Theory • The CAPM is an excellent representation of the process by which stock prices are determined, but it is not perfect. • The underlying assumptions of the CAPM may not hold well in the real world. Also, there are serious doubts about its testability. • Moreover, CAPM is a single period model based on the market factor influencing the security’s returns. • An alternative to the above equilibrium asset pricing model is the multifactor asset pricing model purely based on the arbitrage arguments. Friday, 15 July 2022 Investment Planning & Asset Management

Arbitrage Pricing Theory • It is the Arbitrage Pricing Theory (APT) model developed by economist Stephen Ross in 1976. • The key point behind APT is a logical statement that security returns are not based on one single factor of the market, rather it is influenced by multiple macro-economic factors where sensitivities to each factor is represented by a factor specific beta coefficient. • The APT model proposes that there exists a linear relationship between the return on asset and the number of risk factors. Friday, 15 July 2022 Investment Planning & Asset Management

Assumptions of APT Model • The arbitrage pricing theory relies on three assumptions: • A factor model can be used to describe the relation between risk and return of a security, • There are sufficient securities to diversify away non systematic risk, and • Efficient and well-functioning security markets do not allow for persisting arbitrage opportunities. • APT also emphasizes the Law of One Price which implies that the two securities will command the market price given that they are equivalent in all economically relevant respects. • In other words, in an equilibrium market (with no arbitrage condition), the two identical securities having same degree of risk will have same price i.e. will have same return in the market in the long run. • However, in the short run disequilibrium, there may be differences in the market price of securities having same amount of risk. This would induce arbitrage activities by the arbitrageurs, until the arbitrage opportunities are eliminated. Friday, 15 July 2022 Investment Planning & Asset Management

Random Walk • Certain implications arise from acceptance of efficient market hypothesis. One of those is that the past movement or direction of the price of a stock cannot be used to predict its future movement, that future stock prices evolve according to a random walk and thus cannot be predicted with accuracy. • This is the focus of the random walk hypothesis. As is the case with the EMH, if random walk is completely valid, one has no reason to do either fundamental or technical analysis. • The only way to get better investment returns than provided by the market is to accept greater risk (i.e., it is impossible to outperform the market). • As suggested in our discussion of EMH, experience seems to show that there is value in careful analysis and interpretation. • Further, those who practice technical analysis would say that future stock prices—or at least their direction—can be predicted based on trend analysis. • If there is a place for either fundamental or technical analysis, we must assume that the random walk hypothesis cannot completely be supported. • The truth likely sits somewhere between the poles of “analysis provides value,” and “full acceptance of random walk and EMH.” A large amount of research exists to support both poles and most options between the two. Friday, 15 July 2022 Investment Planning & Asset Management

• Chapter 5 completes here • Thanks a lot Friday, 15 July 2022 Investment Planning & Asset Management

Chapter 6: Asset Allocation Friday, 15 July 2022 Investment Planning & Asset Management

Asset Allocation Asset allocation is the process of distributing portfolio investments among different asset classes, such as money market instruments, bonds, stocks, real estate and commodities. The asset allocation decision has a profound impact on the long-term results from a portfolio, so this decision deserves attention. Furthermore, asset allocation is important in investing because the asset allocation of a portfolio determines its risk/return characteristics. The process involves two main decisions: 1. Which asset classes will be included or excluded from an investor’s portfolio. 2. How the portfolio will be weighted among the asset classes chosen for the portfolio. Friday, 15 July 2022 Investment Planning & Asset Management

Asset Allocation Strategies The investment advisor has several asset allocation strategy types from which to choose. Broadly, asset allocation approaches include: 1. Strategic Allocation Long-term Generally, passive once the asset mix has been chosen Rebalanced periodically to return to the original allocation percentages 2. Tactical Allocation Shorter-term (than that for strategic allocation) Responds to changes in the market(s) Can involve market timing and sector rotation Friday, 15 July 2022 Investment Planning & Asset Management

Asset Allocation Strategies 3. Core/satellite Allocation Generally, strategic allocation with a tactical overlay Strategic allocation is the largest portion (e.g., 80%) Core often invested passively in index funds to get broad market exposure (beta) Satellite actively invested to take advantage of market opportunities (alpha) 4. Dynamic Allocation Portfolio shifted between riskless (e.g., Treasuries) and risky assets in response to market movements and portfolio value changes Primarily a hedging allocation to insure against too large a decline in value Requires constant attention and adjustment Used mostly by institutional investors Friday, 15 July 2022 Investment Planning & Asset Management

Strategic Asset Allocation • Strategic asset allocation focuses on selecting a mix of different asset classes, assigning a target weighting (percentage of total portfolio) and rebalancing on a regular basis (at least annually). • Once the investor determines the asset mix and the percentages (e.g., 65% stocks, 25% bonds and 10% cash equivalents), the intention is to maintain the balance within the portfolio within an acceptable range. • The selection and weighting of asset classes is guided by modern portfolio theory and the creation of the optimal portfolio for each client. Friday, 15 July 2022 Investment Planning & Asset Management