b322 chapter 19
Post on 03-Apr-2018
221 Views
Preview:
TRANSCRIPT
-
7/28/2019 B322 Chapter 19
1/30
Chapter 19
Asset Allocation
-
7/28/2019 B322 Chapter 19
2/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-2
Chapter Objectives
Explain how diversification amongassets can reduce risk
Describe strategies that can be usedto diversify among stocks
Explain asset allocation strategies Identify factors that affect your asset
allocation decisions
-
7/28/2019 B322 Chapter 19
3/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-3
How Diversification Reduces Risk
Benefits of portfolio diversification
Asset allocation: the process of allocating
money across financial assets with theobjective of achieving a desired returnwhile maintaining risk of a tolerable level
Building a portfolio Portfolio: a set of multiple investments in
different assets
-
7/28/2019 B322 Chapter 19
4/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-4
How DiversificationReduces Risk (contd)
Focus on Ethics: The risk of insider trading Insider information: information known by
insiders (such as managers) of a firm, but notknown by investors
Investors can legally only use information thatis publicly available
Securities and Exchange Commissionprosecutes violators
-
7/28/2019 B322 Chapter 19
5/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-5
How DiversificationReduces Risk (contd)
Determining portfolio benefits
Compare return on the investments within
the portfolio to the overall portfolioDiversification reduces the exposure of your investments to the adverse effects of any individual investment
-
7/28/2019 B322 Chapter 19
6/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-6
How DiversificationReduces Risk (contd)
Factors that influence diversificationbenefits
Volatility of each individual stockImpact of correlations among stocks
Highly correlated stocks limit diversification Consider stocks that are not influenced by the
same conditions
-
7/28/2019 B322 Chapter 19
7/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-7
-
7/28/2019 B322 Chapter 19
8/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-8
How DiversificationReduces Risk (contd)
-
7/28/2019 B322 Chapter 19
9/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-9
How DiversificationReduces Risk (contd)
-
7/28/2019 B322 Chapter 19
10/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-10
Financial Planning Online: Correlationsamong Stock Returns
Go to: http://finance.yahoo.com/?u This Web site provides a graph that
shows the returns on two stocks so thatyou can determine their degree of correlation. To perform your own
comparison, insert a stock symbol, andthen click on Charts
http://finance.yahoo.com/?uhttp://finance.yahoo.com/?u -
7/28/2019 B322 Chapter 19
11/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-11
Financial Planning Online: Correlationsamong Stock Returns (contd)
Next, enter the symbol for another stockin the box just below the chart where issays Compare
-
7/28/2019 B322 Chapter 19
12/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-12
Strategies for Diversifying Among Stocks
Diversification of stocks acrossindustries
Less risky than a portfolio of stocks allfrom the same industry
Even such a portfolio is still susceptible
to general economic conditions
-
7/28/2019 B322 Chapter 19
13/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-13
Strategies for Diversifying Among Stocks (contd)
-
7/28/2019 B322 Chapter 19
14/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-14
Strategies for Diversifying Among Stocks (contd)
Diversification of stocks acrosscountries
Economic conditions tend to varyamong countries
Foreign stocks typically more volatilethan U.S. stocks so it is best to diversify
among stocks within each foreign countryMany advisors recommend an 80/20 splitbetween U.S. and foreign stocks
-
7/28/2019 B322 Chapter 19
15/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-15
-
7/28/2019 B322 Chapter 19
16/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-16
Asset Allocation Strategies
Including bonds in the portfolioBond and stock returns are not highly correlated
Investing in more bonds lowers market riskbut increases interest rate risk
Including real estate investments inthe portfolio
Real estate investment trusts (REITs): trusts thatpool investments from individuals and use theproceeds to invest in real estate
-
7/28/2019 B322 Chapter 19
17/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-17
Asset Allocation Strategies (contd)
Similar to closed-end mutual funds
Managed by real estate professional
Types of REITs Equity REITs: REITs that invest money directly
in properties Mortgage REITs: REITs that invest in
mortgage loans that help to finance thedevelopment of properties
-
7/28/2019 B322 Chapter 19
18/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-18
Asset Allocation Strategies (contd)
Role of REITs in asset allocation REITs could perform well when stocks or
bonds are performing poorly
-
7/28/2019 B322 Chapter 19
19/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-19
Asset Allocation Strategies (contd)
Including stock options in the portfolio
Stock option: an option to purchase or sell
stocks under specified conditionsTraded on exchanges
Call option: provides the right to
purchase 100 shares of a specified stockat a specified price by a specifiedexpiration date
-
7/28/2019 B322 Chapter 19
20/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-20
Asset Allocation Strategies (contd)
Exercise (strike) price: the price at whicha stock option is exercised
Premium: the price that you pay whenpurchasing a stock option
Put option: provides the right to sell 100shares of a specified stock at a specifiedprice by a specified date
-
7/28/2019 B322 Chapter 19
21/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-21
Asset Allocation Strategies (contd)
The role of stock options inasset allocation
Very risky; should only pay a minimal rolein asset allocationCovered call strategy: selling call optionson stock that you own
How asset allocation affects riskTo maintain a low risk, asset allocationshould emphasize low risk investments
-
7/28/2019 B322 Chapter 19
22/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-22
Asset Allocation Strategies (contd)
Benefits of asset allocationInvestors who diversify experiencebetter performance
An affordable way to conductasset allocation
Invest in different types of mutual funds
-
7/28/2019 B322 Chapter 19
23/30
Asset Allocation Strategies (contd)
-
7/28/2019 B322 Chapter 19
24/30
-
7/28/2019 B322 Chapter 19
25/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-25
Factors That Affectthe Asset Allocation Decision
Your stage in life
Younger investors need safer, more
liquid securitiesInvestors not needing liquidity mightconsider investing in securities with highgrowth potential
Investors nearing retirement may chooseinvestments that will generate income
-
7/28/2019 B322 Chapter 19
26/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-26
Factors That Affectthe Asset Allocation Decision (contd)
Your degree of risk tolerance Your expectations about economic conditions
If you expect a strong stock market, investin stocks
If you expect a weak stock market, invest in bonds
If you expect lower interest rates, invest inlong-term bondsIf you expect favorable real estate conditions,invest in REITs
-
7/28/2019 B322 Chapter 19
27/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-27
-
7/28/2019 B322 Chapter 19
28/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-28
Financial Planning Online: Advice on Your Asset Allocation
Go to: http://moneycentral.msn.com/investor/calcs/assetall/main.asp
This Web site provides a personalrecommended asset allocationconsidering your income, your stage inlife, and other characteristics once youinput some basic information
http://moneycentral.msn.com/investor/calcs/assetall/main.asphttp://moneycentral.msn.com/investor/calcs/assetall/main.asphttp://moneycentral.msn.com/investor/calcs/assetall/main.asphttp://moneycentral.msn.com/investor/calcs/assetall/main.asphttp://moneycentral.msn.com/investor/calcs/assetall/main.asp -
7/28/2019 B322 Chapter 19
29/30
Copyright 2007 Pearson Addison-Wesley. All rights reserved. 19-29
How Asset Allocation Fits within Your Financial Plan
Key decision concerning assetallocation for your financial plan are:
Is your present asset allocation of investments appropriate?
How will you apply asset allocation inthe future?
-
7/28/2019 B322 Chapter 19
30/30
Copyright 2007 Pearson Addison Wesley All rights reserved 19-30
Integrating Key Concepts
top related