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Passive management 1 27 the investors portfolio asset

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Unformatted text preview: e Investment Process Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management 1-27 The Investor’s Portfolio Asset allocation – Choice among broad asset classes Stocks Bonds Alternative Assets Money market securities 60% 30% 6% 4% Security selection – Choice of which securities to hold within asset Choice class class The asset allocation decision is the primary The determinant of a portfolio’s return determinant 1-28 Risk-Return Trade-Off How should one measure risk Assets with higher expected returns have Assets greater risk greater What role does diversification play 1-29 Efficient Markets Theory Should be neither underpriced nor Should overpriced securities overpriced Security price should reflect all information Security available to investors available – Whether we believe markets are efficient affects our choice of appropriate investment management style. 1-30 Active vs. Passive Management Active Management (inefficient markets) Active Finding undervalued securities Timing the market Passive Management (efficient markets) Passive No attempt to find undervalued securities • Indexing No attempt to time • Constructing an Holding an efficient portfolio “efficient” portfolio 1-31 Players in the Financial Markets Business Firms – net borrowers Business Households – net savers Governments – can be both borrowers Governments and savers and Financial Intermediaries – Commercial Banks : Traditional line of business: Make Com...
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