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WM Lect 3 Wk 4_Asset allocation_Jessica

WM Lect 3 Wk 4_Asset allocation_Jessica - Wealth Management...

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Wealth Management FINS2643 Lecture 3 Week 4 Asset Classes and Asset Allocation Lecture 3 Summary Investment Objectives Return expectation Short/Long term goals Income & taxes Constraints Income requirements Time horizon/liquidity Taxation consideration Risk tolerance 4 Sources of investment returns Asset allocation (active & passive) Market timing (active) Industry timing (active) Stock picking (active) Asset allocation strategies Static asset allocation o Buy low, sell high o Portfolio rebalancing Dynamic o Tactical Asset Allocation (economic and market cycles) o Sector rotation (industry timing; between AA & stock picking) Article: Are Stocks Really Less Volatile in the Long Run (Pastor et al 2011) Stocks are often considered less volatile over long horizons due to mean reversion induced predictability However, studies show that mean reversion’s negative contribution to long- horizon variance is offset by: o Uncertainty about future returns o Uncertainty about current expected returns; and o Estimation risk Thus stocks are more volatile at long horizons than at short horizons, and may be less appealing to long horizon investors than conventional wisdom suggests… Homework Tutorial 4 JESSICA YANG 1
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Chapter 5 Question 2: Different ways to invest: Key asset classes Shares o Ownership in a corporation o Listed shares – liquidity and growth o Private equity (unlisted) – growth and diversification Fixed income securities o Bonds, preference shares, convertible securities o Income & maturity matching Derivatives o Derive value from underlying security or asset: Options, futures, CFDs o Form of leverage and ability to hedge risk, also useful for tax management Real estate o Residential, land, commercial o Occupancy, income, growth Commodities o Old and precious metals, gemstones, collectibles e.g. stamps o Diversification Managed funds o Unit trusts, cash trusts, allocated pensions, super funds o Access to other asset classes e.g. commercial properties & commodities Question 3: Discuss the various types of risks that impact on investments. 1) Exchange rate risk 2) Business risk 3) Financial risk 4) Purchasing power risk 5) Interest rate risk 6) Liquidity risk 7) Tax risk 8) Market risk 9) Event risk Question 4: What is the difference between holding period return and internal rate of return?
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