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Finance

I don't have a specific example, but this was provided on astudy guide:
For a portfolio with three assets, determine the allocationneeded to have a portfolio yielding the market return.
How would I go about determining the weights if I know thereturn?

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In its simplest terms asset allocation is the practice of dividing resources among different categories such as stocks bonds mutual funds investment partnerships real estate cash equivalents and private equity The theory is that the investor can lessen risk because each asset class has a different correlation to the others when stocks rise for example bonds often fall At a time when the stock market begins to fall real estate may begin generating aboveaverage returns The amount of an investors total portfolio placed in each class is determined by an asset allocation model These models are designed to reflect the personal goals and risk tolerance of the investor Furthermore individual asset classes can be subdivided into sectors for example if the asset allocation model calls for 40 of the total portfolio to be invested in stocks the portfolio manager may recommend different allocations within the field of stocks such as recommending a certain percentage in largecap midcap banking manufacturing etc Model Determined by Need Although decades of history have conclusively proved it is more profitable to be an owner of corporate America viz stocks rather than a lender to it viz bonds there are times when equities are unattractive compared to other asset classes think late1999 when stock prices had risen so high the earnings yields were almost nonexistent or they do not fit with the particular goals or needs of the portfolio owner A widow for example with one million dollars to invest and no other source of income is going to want to place a significant portion of her wealth in fixed income obligations that will generate a steady source of retirement income for the remainder of her life Her need is not necessarily to increase her net worth but to preserve what she has while living on the proceeds A young corporate employee just out of college however is going to be most interested in building wealth He can afford to ignore market fluctuations because he doesnt depend upon his investments to meet day to day living expenses A portfolio heavily concentrated in stocks under reasonable market conditions is the best option for this type of investor Model Types Most asset allocation models fall somewhere between four objectives preservation of capital income balanced or growth Preservation of Capital Asset allocation models designed for the preservation of capital are largely for those who expect to use their cash within the next twelve months and do not wish to risk losing even a small percentage of principal value for the possibility of capital gains Investors that plan on paying for college purchasing a house or acquiring a business are examples of those that would seek this type of allocation model Cash and cash equivalents such as money markets treasuries and commercial paper often compose upwards of eighty percent of these portfolios The biggest danger is that the return earned may not keep pace with inflation eroding purchasing power in real terms Income Portfolios that are designed to generate income for their owners often consist of investmentgrade fixed income obligations of large profitable corporations real estate most often in the form of Real Estate Investment Trusts or REITs treasury notes and to a lesser extent shares of bluechip companies with long histories of continuous dividend payments The typical incomeoriented investor is one that is nearing retirement Another example would be a young widow with small children receiving a lumpsum settlement from her husbands life insurance policy and cannot risk losing the principal although growth would be nice the need for cash in hand for living expenses is of primary importance Balanced Halfway between the income and growth asset allocation models is a compromise known as the balanced portfolio For most people the balanced portfolio is the best option not for financial reasons but for emotional Portfolios based on this model attempt to strike a compromise between longterm growth and current income The ideal result is a mix of assets that generate cash as well as appreciates over time with smaller fluctuations in quoted principal value than the allgrowth portfolio Balanced portfolios tend to divide assets between mediumterm investmentgrade fixed income obligations and shares of common stocks in leading corporations many of which may pay cash dividends Real estate holdings via REITs are often a component as well For the most part a balanced portfolio is always vested meaning very little is held in cash or cash equivalents unless the portfolio manager is absolutely See Answer

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I don't have a specific example, but this was provided on a study guide: For a portfolio...

60.1K

Verified Solution

Question

Finance

I don't have a specific example, but this was provided on astudy guide:
For a portfolio with three assets, determine the allocationneeded to have a portfolio yielding the market return.
How would I go about determining the weights if I know thereturn?

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I don't have a specific example, but this was provided on a study guide: For a portfolio...

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Finance

I don't have a specific example, but this was provided on astudy guide:For a portfolio with three assets, determine the allocationneeded to have a portfolio yielding the market return.How would I go about determining the weights if I know thereturn?

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I don't have a specific example, but this was provided on astudy guide:
For a portfolio with three assets, determine the allocationneeded to have a portfolio yielding the market return.
How would I go about determining the weights if I know thereturn?