Risk Management &

Asset allocationby

Jony Islam

What is Asset Allocation• A comprehensive and complex process oriented towards optimizing returns

within comfort zones

• Systematised approach to invest in various asset class• Based on defined future goals and requirements• Investors circumstances, risk profile and time horizon available for investments• Analysis of risk tolerance of the investor

The goal of asset allocation• - select an “optimal” portfolio of assets given a plan’s risk tolerance

and capital market expectations.

• • Risk tolerance includes factors such as:• — Time horizon;• — Demographics;• — Plan design;• — Funded level; and• • Typically, assets are modeled with a “mean/variance” optimizer, and

the• results are integrated with liability modeling.• Goal analysis- The goal of the asset allocation process is to select an

“optimal” portfolio of assets given a plan’s risk tolerance and capital market expectations exposure.

Connection between Asset allocation and Diversification• Don’t put all your eggs in one basket

• Simply a strategy to spread risk with the assumption that downside in one area will get covered by upside in another investment.

• Asset allocation allows building of portfolios having specific financial goals in mind

• Control risk

Importance of rebalancing• picture

Diversification- theory• Mean/ variance optimization

• Picture

• Efficient frontier pic

What is risk?

• Standard deviation

• Beta

Asset allocation models

• Between 4 objectives:

• -Capital preservation

• Income

• Balanced

• Growth Oriented

Adopting the right model• Set specific future financial

goals

• Determine time horizon

• Analysis of Risk tolerance

ASSETS MANAGED IN THE UK

Source: Investment Management Association

Equities45.8%

Bonds36.4%

Other10.1%Money Market

7.7%

High Yield Bonds0.5%

Investment Grade Bonds

48.0%

Government Debt

51.5%

Asset Allocation £1 trillion Fixed Income Allocation £366 billion

HEDGING

Example of a saxo clients portfolio

• Building optimal portfolio using leverage/collateral

• Asset classes available on the Saxo trader

• Risk management tools

• Practical strategies• - stop/loss • -trailing

Thank you for your time!