The Importance of Asset Allocation

The Importance of Asset Allocation - 2-1The Importance of...

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Unformatted text preview: 2-1The Importance of Asset AllocationAn investment strategy is based on four decisionsWhat asset classes to consider for investmentWhat policy weights to assign to each eligible classWhat allocation ranges are allowed based on policy weightsWhat specific securities to purchase for the portfolio2-2Exhibit 2.82-3The Importance of Asset AllocationInvestment Returns after Taxes and InflationExhibit 2.9Compounded Annual Returns: 1981-2007Before Tax After Taxes After TaxesAfter & Inflation & Inflation Inflation Common Stock 9.41%6.78%3.68%6.31%LT Gov. Bonds 7.33%5.28%2.18%4.23%Treasury Bills5.55%3.99%0.89%2.45%Municipal Bonds 6.88%6.88%3.78%3.78%2-4The Importance of Asset AllocationReturns and Risks of Different Asset ClassesHistorically, small company stocks have generated the highest returns, so have the volatilityInflation and taxes have a major impact on returnsReturns on Treasury Bills have barely kept pace with inflationMeasuring risk by the probability of not meeting your investment return objective 2-5...
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The Importance of Asset Allocation - 2-1The Importance of...

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