1、Lecture Presentation Software to accompanyInvestment Analysis and Portfolio ManagementSeventh Editionby Frank K. Reilly & Keith C. BrownChapter 2Chapter 2The Asset Allocation DecisionQuestions to be answered:What is asset allocation?What are the four steps in the portfolio management process?What is

2、 the role of asset allocation in investment planning?Why is a policy statement important to the planning process?Chapter 2The Asset Allocation DecisionWhat objectives and constraints should be detailed in a policy statement?How and why do investment goals change over a persons lifetime and circumsta

3、nces?Why do asset allocation strategies differ across national boundaries?Financial Plan PreliminariesInsuranceLife insuranceTerm life insurance - Provides death benefit only. Premium could change every renewal period Universal and variable life insurance provide cash value plus death benefit Financ

4、ial Plan PreliminariesInsuranceHealth insuranceDisability insuranceAutomobile insuranceHome/rental insuranceLiability insuranceFinancial Plan PreliminariesCash reserveTo meet emergency needsIncludes cash equivalents (liquid investments)Equal to six months living expenses recommended by expertsIndivi

5、dual Investor Life CycleAccumulation phase early to middle years of working careerConsolidation phase past midpoint of careers. Earnings greater than expensesSpending/Gifting phase begins after retirementIndividual Investor Life CycleNet WorthAgeAccumulation PhaseLong-term: Retirement Childrens coll

6、ege Short-term: House CarConsolidation PhaseLong-term: RetirementShort-term:VacationsChildrens CollegeSpending Phase Gifting PhaseLong-term: Estate PlanningShort-term: Lifestyle Needs Gifts Exhibit 2.1Life Cycle Investment GoalsNear-term, high-priority goalsLong-term, high-priority goalsLower-priori

7、ty goalsThe Portfolio Management Process1. Policy statement - Focus: Investors short-term and long-term needs, familiarity with capital market history, and expectations2. Examine current and project financial, economic, political, and social conditions - Focus: Short-term and intermediate-term expec

8、ted conditions to use in constructing a specific portfolio3. Implement the plan by constructing the portfolio - Focus: Meet the investors needs at the minimum risk levels4. Feedback : Monitor and update investor needs, environmental conditions, portfolio performanceExhibit 2.2The Portfolio Managemen

9、t Process 1. Policy statementspecifies investment goals and acceptable risk levelsshould be reviewed periodicallyguides all investment decisionsThe Portfolio Management Process 2. Study current financial and economic conditions and forecast future trendsdetermine strategies to meet goalsrequires mon

10、itoring and updatingThe Portfolio Management Process 3. Construct the portfolioallocate available funds to minimize investors risks and meet investment goals The Portfolio Management Process 4. Monitor and updateevaluate portfolio performanceMonitor investors needs and market conditionsrevise policy

11、 statement as neededmodify investment strategy accordinglyThe Need For A Policy StatementHelps investors understand their own needs, objectives, and investment constraintsSets standards for evaluating portfolio performanceReduces the possibility of inappropriate behavior on the part of the portfolio

12、 manager Investment ObjectivesRisk ToleranceAbsolute or relative percentage returnGeneral goalsInvestment ObjectivesGeneral GoalsCapital preservationminimize risk of real lossCapital appreciationGrowth of the portfolio in real terms to meet future needCurrent incomeFocus is in generating income rath

13、er than capital gainsInvestment ObjectivesGeneral GoalsTotal returnIncrease portfolio value by capital gains and by reinvesting current incomeMaintain moderate risk exposureInvestment ConstraintsLiquidity needsVary between investors depending upon age, employment, tax status, etc.Time horizonInfluen

14、ces liquidity needs and risk toleranceInvestment ConstraintsTax concernsCapital gains or losses taxed differently from incomeUnrealized capital gain reflect price appreciation of currently held assets that have not yet been soldRealized capital gain when the asset has been sold at a profitTrade-off

15、between taxes and diversification tax consequences of selling company stock for diversification purposesInvestment ConstraintsTax concerns (continued)interest on municipal bonds exempt from federal income tax and from state of issueinterest on federal securities exempt from state income taxcontribut

16、ions to an IRA may qualify as deductible from taxable incometax deferral considerations - compoundingEquivalent Taxable YieldExampleIf an investor is in the 28% marginal tax rate, a taxable investment yield of 8%has an after-tax yield of 8%(1-0.28), or 5.76%;An equivalent-risk municipal security off

17、ering a yield greater than 5.76% offers the investor greater after-tax returns.On the other hand, a municipal bond yielding 6%has an equivalent taxable yield of 6%/(1-0.28)=8.33%Effect of Tax Deferral on Investor Wealth over Time$1,000Investment ValueTime$10,062.66$5,365.91Exhibit 2.6Methods of Tax

18、DeferralRegular IRA - tax deductibleTax on returns deferred until withdrawal Roth IRA - not tax deductibletax-free withdrawals possibleCash value life insurance funds accumulate tax-free until they are withdrawnEmployers 401(k) and 403(b) plans tax-deferred investmentsLegal and Regulatory FactorsLim

19、itations or penalties on withdrawalsFiduciary responsibilities - “prudent man” ruleInvestment laws prohibit insider tradingUnique Needs and PreferencesPersonal preferences such as socially conscious investments could influence investment choiceTime constraints or lack of expertise for managing the p

20、ortfolio may require professional managementLarge investment in employers stock may require consideration of diversification needs Institutional investors needsConstructing the Policy StatementObjectives - risk and returnConstraints - liquidity, time horizon, tax factors, legal and regulatory constr

21、aints, and unique needs and preferencesDeveloping a plan depends on understanding the relationship between risk and return and the importance of diversificationThe Importance of Asset AllocationAn investment strategy is based on four decisionsWhat asset classes to consider for investmentWhat normal

22、or policy weights to assign to each eligible classDetermining the allowable allocation ranges based on policy weightsWhat specific securities to purchase for the portfolioThe Importance of Asset AllocationAccording to research studies, most (85% to 95%) of the overall investment return is due to the

23、 first two decisions, not the selection of individual investmentsReturns and Risk of Different Asset ClassesHistorically, small company stocks have generated the highest returns. But the volatility of returns have been the highest too（P38）Inflation and taxes have a major impact on returns（P37）Return

24、s on Treasury Bills have barely kept pace with inflationReturns and Risk of Different Asset ClassesMeasuring risk by probability of not meeting your investment return objective indicates risk of equities is small and that of T-bills is large because of their differences in expected returnsFocusing o

25、nly on return variability as a measure of risk ignores reinvestment riskAsset Allocation SummaryPolicy statement determines types of assets to include in portfolioAsset allocation determines portfolio return more than stock selectionOver long time periods, sizable allocation to equity will improve r

26、esultsRisk of a strategy depends on the investors goals and time horizonAsset Allocation and Cultural DifferencesSocial, political, and tax environments influence the asset allocation decisionEquity allocations of U.S. pension funds average 58%In the United Kingdom, equities make up 78% of assetsIn

27、Germany, equity allocation averages 8%In Japan, equities are 37% of assetsSummaryIdentify investment needs, risk tolerance, and familiarity with capital marketsIdentify objectives and constraintsEnhance investment plans by accurate formulation of a policy statementFocus on asset allocation as it det

28、ermines long-term returns and riskThe InternetInvestments OnlineAppendix Objectives and Constraints of Institutional InvestorsMutual Funds pool investors funds and invests them in financial assets as per its investment objectivePension FundsReceive contributions from the firm, its employees, or both

29、 and invests those fundsDefined Benefit promise to pay retirees a specific income stream after retirementDefined Contribution do not promise a set of benefits. Employees retirement income is not an obligation of the firm Endowment FundsThey represent contributions made to charitable or educational i

30、nstitutions Insurance CompaniesLife Insurance Companiesearn rate in excess of actuarial rategrowing surplus if the spread is positivefiduciary principles limit the risk toleranceliquidity needs have increased tax rule changesInsurance CompaniesNonlife Insurance Companiescash flows less predictablefi

31、duciary responsibility to claimantsRisk exposure low to moderateliquidity concerns due to uncertain claim patternsregulation more permissiveBanksMust attract funds in a competitive interest rate environmentTry to maintain a positive difference between their cost of funds and their return on assetsNe

32、ed substantial liquidity to meet withdrawals and loan demandsFace regulatory constraintsFuture topicsChapter 3 Investment choicesIncluding global assets in asset allocation decisions9、靜夜四無鄰，荒居舊業貧。9月-229月-22Sunday, September 18, 202210、雨中黃葉樹，燈下白頭人。21:08:0521:08:0521:089/18/2022 9:08:05 PM11、以我獨沈久，愧君相

33、見頻。9月-2221:08:0521:08Sep-2218-Sep-2212、故人江海別，幾度隔山川。21:08:0521:08:0521:08Sunday, September 18, 202213、乍見翻疑夢，相悲各問年。9月-229月-2221:08:0521:08:05September 18, 202214、他鄉生白發，舊國見青山。18 九月 20229:08:05 下午21:08:059月-2215、比不了得就不比，得不到的就不要。九月 229:08 下午9月-2221:08September 18, 202216、行動出成果，工作出財富。2022/9/18 21:08:0521:08:0518 September 202217、做前，能夠環視四周；做時，你只能或者最好沿著以腳為起點的射線向前。9:08:05 下午9:08 下午21:08:059月-229、沒有失敗，只有暫時停止成功！。9月-229月-22Sunday, September 18, 202210、很多事情努力了未必有結果，但是不努力卻什么改變也沒有。21:08:0521:08:0521:089/18/2022 9:08:05 PM11、