Tutorial: Investment and Asset Allocation Essay

Submitted By LeamonTEA
Words: 765
Pages: 4
Open Document
WEEK 4 TUTORIAL
1. Strategic Asset Allocation vs Tactical Asset Allocation Strategic Asset Allocation | Tactical Asset Allocation | Strategic asset allocation aims to provide investor with long term target returns, and then choose an appropriate asset mix to achieve that returns. The allocation will be reviewed and adjusted periodically (usually from 3-5 years), according to the change in investor's goals and needs overtime. | Tactical asset allocation aims to take advantage of inefficiencies in asset pricing in short term. It involves short term return forecast or valuation. The process will be revised in 1 or 3 months, or even shorter time, and the adjustments will be made within given ranges around target asset-class weights. |

2.
Because we know that security will have a high chance of getting the target long-term return, so if the short-term return is not as high as expected, that means the security is undervalued, so it makes sense to buy more, in order to achieve larger returns in long-term.
3.
Using Sharpe ratio, investor can determine whether or not to add an alternative asset class to current portfolio. So if Sharpe ratio of new portfolio is greater than that of the current portfolio, or in the other way, if Sharpe Rationew asset > (Sharpe Ratiocurrent portfolio * ρ(new asset, current portfolio)) then the new asset will be added.
In our case, if the Sharpe ratio of new asset is greater than 0.4 * 0.35 = 0.14, it will be added. But its predicted Sharpe ratio is only 0.12, so the fund should not add new asset to existing portfolio.
4.
We can use Roy's safety-first ratio
With RL = 3.5% to help Gareth Foundation to choose the asset allocation, the one with the highest ratio is the one that has minimum probability of return not meeting the threshold.
So the ratios of 3 allocations are as follow: Allocation A: 0.444 Allocation B: 0.321 Allocation C: 0.25
So Gareth Foundation should choose allocation A to meet its objective.

5. a. Client's objective is to achieve the expected returns of 5% (inflation + 2%), with the volatility no greater than 6% (below average). So the suggested portfolio mix for the client is as below: Asset | Expected Return (annual) | Volatility (annual) | Weights | Cash | 4% | 0% | 10% | Equities | 8% | 7% | 30% | Fixed Interests | 5% | 3% | 30% | Inflation indexed Bonds | 5% (inflation + 2%) | 4% | 30% | Overall portfolio | 5.8% | | |

b. The funding ratio is 1.1, which means that the client has more assets than liabilities. So if the liabilities are expected to grow at inflation + 1%, the expected return of assets also has to grow, in order to fund more liabilities the client has to pay. The adjusted asset mix will be Asset | Weights | Cash | 5% | Equities | 45% | Fixed Interests | 25% | Inflation indexed bonds | 25% | Overall portfolio | 6.3% |

c. If the funding ratio is 0.6, which means the client has even more liabilities than assets, the expected return of asset has to grow even more in order to fund the payment.
Show More

Related Documents: Tutorial: Investment and Asset Allocation Essay

Business Finance Essay

FINS1613 This subject introduces the theoretical basis and analytical framework for corporate financial decision making.  It is concerned with both company investment decisions and the determination of the financing mix necessary to achieve the company’s financial objectives.  FINS1613_S2_2010_L1   4 You must be enrolled in a tutorial  You must be enrolled in a Stream to take this course If a Stream is full, you will have to attend the other one to comply with UNSW fire safety regulations…

Words 2409 - Pages 10

Coco Mix Essay examples

These investments qualify for a Investment Tax Credit (ITC) of $10,000 which the firm can choose to take it all at once in year zero or distribute it equally over the life of the project. These are the only new investments in fixed assets required during the life of the project. The project is expected to last 10 years at which time it will be shot down. All investments in short- and long-term assets will be liquidated and the proceeds will be received (recorded) in year 11. Investments in working…

Words 1803 - Pages 8

Essay on Modern Portfolio Theory and Real Estate

paper, Matysiak[4] suggests, with some justification but a certain lack of detail, the use of software called optimizers for looking at some kinds of real estate investment problems. He specifically considers the risk associated with capital and income cover and, more particularly, the risk-return trade-off in portfolio asset allocation under different scenarios using modern portfolio theory (MPT). MPT has been advocated as a more rational approach to the construction of real estate portfolios[5]…

Words 3764 - Pages 16

Essay about Investment and Case Study Class

FIN 397.1: INVESTMENT THEORY AND PRACTICE Spring 2015 Sections: #03565 (MW 8:00-9:30 am) and #03570 (MW 9:30-11:00 am) Professor: Office: Keith C. Brown CBA 6.256 Voice Mail: 512-471-6520 Course Website: via Canvas Office Hours: MW 11:00 am– 12:30 pm or by appointment E-Mail: keith.brown@mccombs.utexas.edu Teaching Assistant: Adam Winegar (Office: CBA 5.334N ; Office Hours: TTh 2:00-3:00 pm) Objective: To become a successful investor, an individual must command a considerable amount of financial…

Words 5860 - Pages 24

Depreciation Accounting Essay

types of expense centers: standard cost centers and discretionary expense centers. The new chapter also explains better why only a minority of companies uses residual income-type measures (e.g., EVA, economic profit) of the performances of their investment centers. All other changes were minor. Approach This chapter and the following one are a sharp change of pace from the preceding chapters because there are no numerical techniques or procedures to be learned. Instead, the chapters establish a…

Words 5866 - Pages 24

Measuring And Evaluating Financial Position And Performance

balance sheet and the income statement • Understand the implications of the decision to record expenditure as an asset or as an expense • Understand the differences between cash profit and accrual profit Required Reading Trotman, Gibbins & Carson Chapter 2 Session 1, 2015 ACCT1501 2. Tutorial Questions – Week 3 Preparation Questions • • • DQ 2.1, 2.2 2.11 P1.18, P2.3 Case 2A Tutorial Questions • • DQ 2.6, 2.10 P2.7, P2.9, P2.11, P2.16 Session 1, 2015 ACCT1501 Billabong posts $126.3m half-year…

Words 4141 - Pages 17

Researcher: Cash Flow and Special Consideration Essay

Australian School of Business Banking and Finance FINS 5541 Advanced Investments and Funds Management Course Outline Semester 1, 2013 1 Table of Contents PART A: COURSE-SPECIFIC INFORMATION 1 2 2.1 2.2 2.3 2.4 2.5 3 4 STAFF CONTACT DETAILS COURSE DETAILS Teaching Times and Locations Units of Credit Summary of Course Course Aims and Relationship to Other Courses Student Learning Outcomes LEARNING AND TEACHING ACTIVITIES ASSESSMENT 3 3 3 3 3 3 3 4 4 4 5 5 5 6 6 6 7 8 8 8 8 9 9 9 9 9 10…

Words 3476 - Pages 14

Internet Marketing Essay

com is being designed as a global Internet investment services that is focused on reducing the overall hassle of online investing, in addition to enabling business-to-business transactions for investment industry. GWCapitalinc.com will also attain a competitive edge by offering services such as website investment tracking, which have become essential for any business presence in investment. GWCapitalinc.com intends to establish and operate an Investment advice workshop and tracker with services costing…

Words 6669 - Pages 27

Essay on Sample 20exam 20with 20solutions

examination. The sample examination is therefore similar in format to the final examination. However, questions and topics in the final examination may be different, so students should also revise all other learning materials, such as, lecture notes and tutorial exercises, and importantly review the learning outcomes that are stated in the unit guide. MATERIALS PERMITTED/NOT PERMITTED: Dictionaries: No dictionaries permitted. Calculators: Non-programmable calculators (no text retrieval) permitted. Other:…

Words 5353 - Pages 22

Behavioural Finance Essay

information has immediate and full impact on the prices. In the last twenty years, there has been an intense research made on developing and testing different asset pricing models. Subrahmanyam (2007) categorizes central models of finance as (i) Portfolio allocation based on expected return and risk (ii) risk-based asset pricing models (e.g. Capital Asset Pricing Model) (iii) the pricing of contingent claims, and (iv) the Modigliani-miller theorem and its augmentation by the theory of agency. The presumption…

Words 5646 - Pages 23