View
221
Download
0
Category
Preview:
Citation preview
Portfolio Rebalancing Theory and Practice
Mr Chris Tse, FRM, PRM, CFA, CAIA, CIIA, CFPCM
25 June 2010
June 2010 - Page 2
Asset characteristics and the rebalancing decision How frequently the portfolio should be monitoredTranslating conceptual rebalancing framework into practical strategies
Agenda
June 2010 - Page 3
Portfolio Rebalancing 101 Self Evaluation Test 1 - 5
June 2010 - Page 4
Breakdown of HNMI Financial Assets, 2006-2010F
Self Evaluation Test 1What’s your client’s current asset allocation?
June 2010 - Page 5
Aggressive Growth Product
100%100%
Single Country/Sector FundGlobal Income Fund
Income Product
100%100%
If you are a HNWI with US$100 million investable asset and receive two investment ideas from a private banker, which one would you choose?
Expected Return:
50% chance to have +50% p.a.(Principal + Return = US$150 million)
50% chance to have -50% p.a.(Principal + Return = US$50 million)
Expected Return:
100% chance to have 1% p.m.(Return = US$1 million p.m.)
Self Evaluation Test 2How do you trade-off in reality?
June 2010 - Page 6
A financial advisor has advised his client to buy China Life (02628) at HK$20 (forward P/E: 25X) and sell China Life at HK$28 (forward P/E: 25X) as he expected the high valuation of China Life can be supported by stronger-than-expected growth in earnings.
Has this financial advisor done a good job as he can materialize his view?
A regulator has made an query to a private banker regarding his view/advice for China Life when the China Life is valued at P/E 25X !!! BUY or SELL
Self Evaluation Test 3Have you justified your own advice?
June 2010 - Page 7
13,333
13,519
Hang Seng Index Performance (4/1999 – 3/2009)
Source: YAHOO! Finance, April 2009
Self Evaluation Test 4Do you create value through passive portfolio in LT?
How Cheap
How Expensive
June 2010 - Page 8
A financial advisor has advised his client to:
Self Evaluation Test 5Are you a good financial advisor?
Switch Out Switch In Return (HPR)Time Initial VolatilityFinal Volatility
nvestment Grade Bond FundBRIC Fund +10% March 2009 12% 24%
BRIC Fund India Fund +20% May 2009 24% 40%
ndia Fund China Equity Fund+25% June 2009 40% 44%
China Equity Indonesia Fund +20% August 200944% 48%
June 2010 - Page 9
Portfolio Rebalancing 101Please make sure whether you really need portfolio rebalancing
Learning Outcome 1
June 2010 - Page 10
Portfolio Rebalancing 102 Asset Allocation Theory and Practice
June 2010 - Page 11
What is Asset Allocation
Definition
It’s about diversifying one’s portfolio among asset classes such as bonds, stocks, real estate, or cashIt’s referred to in terms of the target percentages for each asset class. For example, a portfolio could have a mix of “60 percent stocks, 30 percent bonds and 10 percent cash”
June 2010 - Page 12
Rationale for Asset Allocation
Rationale
No one single asset class can meet all requirements of the an investorNo one single asset class will perform the best at all time: winners rotate.
Applying appropriate asset mix to achieve a target rate of return, for example:A conservative and old private client is expecting a 7% return per year; should a private banker recommend a single lump-sum investment of allocating 70% in an emerging market equity fund, say iSharesFTSE/Xinhua A50 China Tracker (02823)?
An aggressive and young professional is expecting a 12% return per year; should a private banker recommend a regular saving plan ofallocating 70% in a global bond fund?
June 2010 - Page 13
Pyramid of Wealth Allocation (General)
Individual Equity (up to 20%)
Regional Equity (up to 30%)
Global Equity & Bond (50% to 70%)
Non - CoreHolding
CoreHolding
HighRisk
Medium to High Risk
Low to Medium Risk
June 2010 - Page 14
Pyramid of Wealth Allocation (Asset Class)
Income generating instruments &/or Liquid
Assets
Global Equities
Sector
Hedge
Single Country
Regional
Cushioning portion accounts for 50% of asset base
Growth portion captures growth in short-to-medium term
Equity Core portion for long-term growth
June 2010 - Page 15
Pyramid of Wealth Allocation (Product)
Core & Strategic Investments
Liquid Assets
TacticalInvestments
Margin Account, Short- Term Stocks Trading, Derivatives
Local & Foreign Currency Deposits, Currency- Linked Options, Cash
Bonds, Guaranteed Investments, Structured Products (5 years +), Mutual Funds, Blue Chips, Real Estate Properties
June 2010 - Page 16
Global DiversificationThe Best Risk Management Approach
Source: Standard & Poor’s Micropal (MSCI) - as at 31 December, 2007. Rankings based on the 23 countries in the MSCI World Index. Past performance cannot guarantee future results.
1st 2nd 3rd
AustriaGreeceHong KongHong KongHong KongFinlandSwitzerlandSpainPortugalFinlandFinlandSwitzerlandNew ZealandNew ZealandGreeceAustriaCanadaSpainHong Kong
GermanyUnited KingdomAustraliaSwitzerlandLuxembourgNorwayUSASwedenSwitzerlandBelgiumSingaporeCanadaAustraliaAustriaSwedenNorwayNorwayNorwayGermany
NorwayHong KongUSAUSAFinlandJapanSwedenPortugalItalyItalySwedenDenmarkIrelandAustraliaGermanyGreeceJapanSingaporeNorway
1989199019911992199319941995199619971998199920002001200220032004200520062007
Best-Performing Developed Equity Markets (1989–2007)
June 2010 - Page 17
Significance of Asset Allocation
Brinson, Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: “Asset Allocation helps explain over 93% of a portfolio’s performance”.
Significance relative to return
June 2010 - Page 18
Suggesting the Right Allocation
Asset Allocation
Profile Objective
External Factors
June 2010 - Page 19
Suggesting the Right Allocation
Objective
Required Vs Desired
Time Horizon
Liquidity
Risk Profiling
Willingness Vs Ability
External Factors
Market Fluctuation
June 2010 - Page 20
Approaches to Asset Allocation
Strategic Asset Allocation Tactical Asset Allocation
Investors’ Management Investment Management
Using the inherent properties of each asset class
Move in and out of asset classes at the most beneficial time
Benchmark asset allocation to each asset class (Risk Profiling)
Deviations from the long term/benchmark (Beat the Market)
Selection of portfolios on the efficient frontier
Calls for upward shifts of the efficient frontier (Alpha Picking)
June 2010 - Page 21
Strategic Asset AllocationWhat Does Strategic Asset Allocation - SAA Mean?
A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocationAt the inception of the portfolio, a "base policy mix" is established based on expected returnsStrategic asset allocation generally implies a buy-and-hold strategy, even as the shift in the values of assets cause a drift from the initially established policy mixFor this reason, you may choose to adopt a constant-weighting approach to asset allocation. With this approach, you continually rebalance your portfolioBecause the value of assets can change given market conditions, the portfolio constantly needs to be re-adjusted to meet the policyFor example, if one asset were declining in value, you would purchase more of that asset, and if that asset value should increase, you would sell itThere are no hard-and-fast rules for the timing of portfolio rebalancing under strategic or constant-weighting asset allocationHowever, a common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value
June 2010 - Page 22
Risk Profiling – Typical Profiles
1. Income Investor: focus on regular dividend income & low volatility
2. Conservative Investor: focus on regular dividend income & possible long term capital appreciation with low volatility
3. Balanced Investor: focus on long term capital appreciation & possible dividend income with moderate volatility
4. Growth Investor: focus on medium to long term capital appreciation with moderate to high volatility
5. Aggressive Growth Investor: focus on capturing capital growth from high fluctuation of unit price
June 2010 - Page 23
Risk Profiling - Two Dimensions
Investment suitability
“Selling the right products to the right clients”
Client sophistication
Product sophistication
matches
Investment objective
Portfolio allocation
matches
SophisticationFocus on Product complexity:
Does the client understand the product’s complexity?
Risk toleranceFocus on Portfolio Risk:
Is the portfolio risk exposure consistent with the client’s risk tolerance?
Matches ?
June 2010 - Page 24
Aggressive Growth 100%100% Conservative
Growth
20%20%
40%40%40%40%
Income 20%20%20%20%60%60%
20%20%
80%80%Growth
40%40%60%60%
Moderate Growth
StocksBondsCash Equivalents
Source: Franklin Templeton Learning Academy
Risk Profiling – Strategic Asset Allocation
June 2010 - Page 25
Making Strategic Asset Allocation Work
Periodic RebalancingAvoid over exposure to riskAvoid under exposure to future growth potential
Periodic ReviewsReflect asset allocation to financial commitment over timeSmoothen the shift in asset class weightages
June 2010 - Page 26
Ways to Rebalance
Sell holdings that are over the target allocation
Increase the dollar amount to be invested and buy the under-allocated assets
Direct dividends from over-allocated assets to under-allocated assets
June 2010 - Page 27
When to Rebalance
Weekly, monthly, quarterly, semi-annually…..Trigger Point
Profit Taking (Meet Objective)Risk Limitation (Meet Risk Profiling)Market Fluctuations (Driven by External Factors)
Other factors to considerTaxTransaction Costs
June 2010 - Page 28
Periodic Rebalancing
50%50%Profile & objective based allocation
Bond FundsEquity FundsEXAMPLE
REBALANCING HELPS INVESTORS ENTER REBALANCING HELPS INVESTORS ENTER EQUITIES AT EQUITIES AT ‘‘LOWSLOWS’’ AND EXIT AT AND EXIT AT ‘‘HIGHSHIGHS’’ WITHOUT HAVING TO WITHOUT HAVING TO ‘‘TIMETIME’’ THE MARKETTHE MARKET
20%80%
50%50%Rebalance
Bull Market conditionsBull Market conditions
June 2010 - Page 29
Tactical Asset Allocation
What Does Tactical Asset Allocation - TAA Mean?An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectorsThis strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplaceIt is as a moderately active strategy since managers return to the portfolio's original strategic asset mix when desired short-term profits are achievedInherently contrarian method of investing
June 2010 - Page 30
Portfolio Rebalancing 101Please make sure whether you really need portfolio rebalancing
Portfolio Rebalancing 102Please make sure you know all the basics about asset allocation
Learning Outcome 2
June 2010 - Page 31
Portfolio Rebalancing 103 Portfolio Rebalancing Strategies
June 2010 - Page 32
Portfolio Rebalancing Strategy
Buy-and Hold StrategyTarget investment in stocks = Portfolio value – Floor value
Constant-Mix StrategyTarget investment in stocks = m x Portfolio value
Constant-Proportion Portfolio Insurance (CPPI) StrategyTarget investment in stocks = m x (Portfolio value – Floor value)
June 2010 - Page 33
Buy-and-hold Vs Constant Mix
The buy-and-hold strategy has a linear payoff to the performance of the stock market, whereas the constant weighted allocation strategy does not
Insured Asset Allocation - This is a type of dynamic asset allocation strategy where the payoff is convex
So finally the goal of asset allocation is to create a unique portfolio that suits your needs and wants in the market
June 2010 - Page 34
Applying Different Portfolio Rebalancing Strategies
Constant-Mix Buy-and-HoldCPPI
Market Up Underperform Outperform Outperform
Market Flat Outperform Neutral Underperform
Market Down Underperform Outperform Underperform
Payoff Curve Concave Linear Convex
Portfolio Insurance Selling Insurance None Buying Insurance
Multiplier 0<m<1 m=1 m>1
June 2010 - Page 35
60
65
70
75
80
85
90
95
100
105
110
T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10
Date
Pric
e
Downward Trend
Downward Trend+20%
-20%+20%
-20%
+20%
-20%
+20%
-20%+20%
-20%
+5%-5%
+5%-5%
+5%-5% +5%
-5%+5%
-5%
±5% volatility
±20% volatility
Volatility Strategy: Fund with ±5% and ±20% volatility
Without Doing Rebalancing in Volatile Markets Ensures Loss
June 2010 - Page 36
Asymmetrical Oscillations Ensure Trend
Fund with upward trend
80
100
120
140
160
180
200
T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10
Date
Pric
e
+10.5% +10.5 %
+10.5%
+10.5%
+10.5%
-5%-5%
-5%
-5%
-5%
June 2010 - Page 37
JP Morgan Global T raded -USD! (NX) B/B UDJ USD 16.36 MSCI World USD * (NX) O/B GRS GBP -11.71
52
58
64
70
76
82
88
94
100
106
112
118
124
Price Indexed
Percent Change
-48
-42
-36
-30
-24
-18
-12
-6
0
6
12
18
24
Apr Jul Oct 09 Apr Jul
Global Equities Vs Global Bond Good for Constant-Mix? Why?
Source: Morningstar
JP Morgan Global Govt Bond Index
MSCI World Index
MSCI World Vs JPM Global Govt Bond Index Performance (1/1/2008 - 30/9/2009)
June 2010 - Page 38
MSCI AC Asia Pac xJapan USD* (NX) 77.40 JP Morgan Global Traded -USD! (NX) 40.57
80
100
120
140
160
180
200
220
240
260
280
Price Indexed
Percent
Change
-20
0
20
40
60
80
100
120
140
160
180
05 06 07 08 09
Asian Equities Vs Global BondGood for CPPI? Why?
Uptrend: Equities Increased by 10% Underweight 25% Fixed IncomeDowntrend: Equities Dropped by 10% Overweight 50% Fixed Income
MSCI AC Asia Pacific ex-Japan Vs
JP Morgan Global Govt Bond
Index Performance (1/1/2004 - 30/9/2009)
Source: Morningstar
MSCI AC Asia Pacific ex-Japan Index
JPM Global Govt Bond Index
June 2010 - Page 39
Parameters Determining the Success of Different Portfolio Rebalancing Strategies
Target Market (ex-ante and ex-post volatility)
Expectation Horizon
Number of Top-up Investments (e.g. 4 times)
Target Floor Value at each Top-upsay 90%/80%/70%/60% of initial portfolio value for Constant-MixSay 110%/120%/130%/140% of initial portfolio value for CPPI
June 2010 - Page 40
Portfolio Rebalancing 101Please make sure whether you really need portfolio rebalancing
Portfolio Rebalancing 102Please make sure you know all the basics about asset allocation
Portfolio Rebalancing 103Please formulate your view on the target market before you are adopting your
portfolio rebalancing strategies
Learning Outcome 3
June 2010 - Page 41
Portfolio Rebalancing 104 Constant-Mix Strategy for Volatile Markets
June 2010 - Page 42
Applying Systematic Investing in Bull MarketEnjoying Market Volatility, Reducing Market Timing Risk
16,96211,888
Hang Seng Index Performance (12/1993 – 12/1999)Lump-sum Investing: +42.68%
Regular Saving: +65.25%
Source: YAHOO! Finance, April 2009
June 2010 - Page 43
Applying Systematic Investing in Bear MarketEnjoying Market Volatility, Reducing Market Timing Risk
16,96214,876
Hang Seng Index Performance (12/1999 – 12/2005)Lump-sum Investing: -12.3%
Regular Saving: +21.64%
Source: YAHOO! Finance, April 2009
June 2010 - Page 44
Applying Systematic Investing in Flat MarketEnjoying Market Volatility, Reducing Market Timing Risk
13,333
13,519
Hang Seng Index Performance (4/1999 – 3/2009)Lump-sum Investing: +1.40%
Regular Saving: +7.23%
Source: YAHOO! Finance, April 2009
June 2010 - Page 45
Maintaining A Long Term PerspectiveTime is Much More Important Than Timing
When is Trough? Time to Enter? When is Peak? Time to Exit?
Time as a Risk Moderator
Dollar Cost Averaging
Source: YAHOO!Finance
Excitement
Fear
Panic
June 2010 - Page 46
Regular Saving Follows Constant-Mix Strategy
Dollar Cost Averaging provides a guide to enter into the market, but how about “Safe Exit”?
DCA follows Constant-Mix Strategy (buy more at lows and buy less at highs)
Time Factor is both BUDDY and ENEMY to DCA
“Dynamic Dollar Cost Average”
Double overweight when current valuation is MUCH lower than the historical average valuation
Stop to Overweight when current valuation is MUCH higher than the historical average valuation
June 2010 - Page 47
Dynamic Dollar Cost Averaging
Source: Bloomberg (17 March 2009)
18X
12X
+/-20%
June 2010 - Page 48
Large Cap Vs Smaller Cap
Source: Bloomberg (12 October 2009)
June 2010 - Page 49
MSCI World Grs USD ! (NX) 12.81 MSCI World Value Grs USD ! (NX) 23.67 MSCI World Growth Grs USD ! (NX) 1.06
40
55
70
85
100
115
130
145
160
175
190
Price Indexed
Percent Change
-60
-45
-30
-15
0
15
30
45
60
75
90
02 03 04 05 06 07 08 09
Source: Morningstar
Practicing Value InvestingA Winner in a Volatile Market
MSCI World Growth
MSCI World Value
MSCI World Index Performance (1/1/2001 - 30/9/2009)
June 2010 - Page 50
Number of stocks with positive returns
Number of stocks with negative returns
2004Index Return:
+15.75%Index Return:
+26.8% 2000Index Return:
-14.0%
2002Index Return:
-19.0%2001
Index Return: -15.8%
2003Index Return:
+31.62%1999
1973
469595
822
1205
856
1275
1367 773
1320
1970
Source: Factset - As at 31 December, 2004. MSCI constituent returns data for MSCI All Country World Free Index measures the total return of each equity security in developed and emerging markets. Index is unmanaged and includes reinvested dividends. One cannot invest directly in an index. MSCI AC World Free aggregate returns from Bloomberg.
130
Bottom Up – Stock SelectionExplore Deep Value from Under-valued Stocks
June 2010 - Page 51
Historical Gold Prices Did Gold Market Exhibit Economic Trend?
Source: Bloomberg (12 October 2009)
June 2010 - Page 52
NASDAQ Index since 1995 Did Tech Stocks Exhibit Economic Trend?
Source: South China Morning Post (December 2005)
June 2010 - Page 53
The Value of Gold (1)
Gold has fallen out of favor for years
Since 1993, many central banks slashed their gold holdings for other safer
investments like US Treasury as reserves backup
Gold supply continued to rise, trapping gold prices in a downward spiral
Disinflation and its failure to preserve value had turned investors away
June 2010 - Page 54
Gold Glows Again Since 1999 (2)
The Washington Agreement on Gold • Limit on gold disposal by the European Central Bank & 14
central banks in Europe• Halted the price fall
Fragile stock marketsLow interest ratesUS Budget deficit ballooningUS Dollar diminishing in its strengthMiddle East crisisUnstable oil prices
June 2010 - Page 55
Historical Commodity Prices - CRB Index
Source: Bloomberg (12 October 2009)
June 2010 - Page 56
Source: Bloomberg (12 October 2009)
Historical Oil Prices – Brent Crude Oil
June 2010 - Page 57
Source: Bloomberg (12 October 2009)
Historical Oil Prices – New York Crude Oil Futures
June 2010 - Page 58
Portfolio Rebalancing 101Please make sure whether you really need portfolio rebalancing
Portfolio Rebalancing 102Please make sure you know all the basics about asset allocation
Portfolio Rebalancing 103Please formulate your view on the target market before you are adopting your
portfolio rebalancing strategiesPortfolio Rebalancing 104
Please make sure whether you know the parameters and the preferred habitat for constant-mix strategies
Learning Outcome 4
June 2010 - Page 59
Portfolio Rebalancing 105 CPPI Strategy for Trendy Markets
June 2010 - Page 60
Any Clear Trend in Hang Seng Index?
Source: Bloomberg (September 2009)
+400%Aug 1984-Sep
198738 Months
+520%Jul 1989-Dec 1993
54 Months
+120%Feb 1995-Jul
199730 Months
+140%Sep 1998-Feb 2000
15 Months
+260%Apr 2003-Oct
200743 Months
-42%Oct-Dec 1987
3 Months
-27%Apr-Jun 1989
3 Months
-38%Jan 1994-Jan 1995
13 Months
-55%Aug 1997-Aug 1998
13 Months
-55%Nov 2007-Jan 2009
15 Months
-50%Mar 2000-Mar 2003
33 Months
Russia and Tequila Crisis
Global Economic Recession/Deflation in Hong Kong
Black Monday
Financial Crisis in China
Global Financial Tsunami
Asian Financial
Crisis
June 2010 - Page 61
Any Clear Trend in DJIA Index since 1990?
Persian Gulf War
90’s Bull Period
Asian Crisis
Collapse of LTCM & Russia
Tech Bubble Burst
Tech Boom
911 Attack
Asset Price Collapse Corporate Scandals
West Coast Strike
US vs Iraq
Source: Bloomberg (December 2005)
June 2010 - Page 62
DJIA Index since 1990
Source: Bloomberg (December 2005)
June 2010 - Page 63
BRIC Long Term Performance (2) MSCI Russia Index
Source: Bloomberg (12 October 2009)
June 2010 - Page 64
BRIC Long Term Performance (2) MSCI Emerging Market India Index
Source: Bloomberg (12 October 2009)
June 2010 - Page 65
BRIC Long Term Performance (2) MSCI Emerging Market China Index
Source: Bloomberg (12 October 2009)
June 2010 - Page 66
Constant Proportion Portfolio Insurance
Objective:
The CPPI is a strategy designed to ensure that a fixed minimum return is achieved at a set date
in the future while optimizing the exposure to a risky asset during all the life of the product
How:
The Principal protection is achieved by adjusting the exposure such as after a maximum
expected loss, the portfolio is still able to buy the zero coupon which will ensure the protection
The strategy involves continuously re-balancing the portfolio of investments during the term of
the product between risky assets (equity) and safe assets (money market)
If market goes up, the exposure to the risky asset will raise and in the meanwhile if the market
goes down, the exposure to the risky asset will be lowered
June 2010 - Page 67
CPPI TerminologyCPPI: Constant Proportion Portfolio Insurance also known cushion management
Risky or Dynamic Asset: exposes the product to one or more markets in order to generate the required return. The risky assets may have a fixed composition or can be actively managed
Risk-free Asset: invested either in money market assets (to guarantee the liquidity of the placement and the requisite level of capital protection) or in a zero coupon bond with the same maturity as the guarantee
Cushion also called the Distance: Difference between the value of the product at a given time and the present value of the next guaranteed amount. This is the maximum amount that can be “lost” without jeopardizing the guarantee
Loss parameter: maximum possible loss of the Risky Asset between 2 trading days of this underlying (fixed by the guarantor)
Multiple: (1/ Loss parameter), is the ratio of exposure to the cushion
Exposure: Percentage of the portfolio invested in dynamic assets (= Cushion/loss parameter)
Present value of
the guarantee
Fees
Cushion
Amount of next
guarantee
Discounting at risk-free rate
t : date of the risk measurement
T : date of the next guarantee
Value of the product
The cushion and therefore the exposure to the dynamic asset depends on :
The level of the guaranteed NAV
The actual NAV resulting from the past return of the dynamic asset
The remaining period of time until the next guarantee date
The level of interest rates
June 2010 - Page 68
Cushion Method
The CPPI is based on an algorithm very simple:
To achieve a given level of capital protection at a certain maturity the portfolio is divided in
two segments:
• The ‘Risky Asset’: its value can go down
• The ‘Risk free Asset’: its value cannot go down (deposits) or its value at maturity is fixed (bonds for that specific maturity)
The present value of the guarantee at maturity is calculated. By definition this is the
minimum value that the portfolio must have at the time of the calculation if you want to be
100% sure to be able to deliver the guarantee at maturity.
You then calculate the difference between the portfolio value and that required minimum
value (the Distance).
You then simply allocate X times that Distance to the risky assets (where X is a mutliple),
the rest (if any) stays in non-risky assets.
June 2010 - Page 69
Illustrating of Dynamic Management Exposure
Value of the portfolio
€100
4% increase of the dynamic asset in T+1*
At inception, loss parameter of the dynamic asset = 25% and 5y rate = 4.5%Steps:1) PV Guarantee = 100 % / (1+4.5%)5 = 80.2%2) Cushion = NAV – PV guarantee = 100-80.2 = 19.83) Mutliple = 1/ loss parameter = 1/25%= 44) Exposure to risky asset = 19.8*4= 79.25) Unrisky asset = NAV – expo risky = 100-79.2= 20.8
Value of the product€ 103.2
Risk free Asset value € 11.2
Value of the Dynamic Asset
€92
Value of the product€ 96.8
Risk free Asset value € 30.3
Value of the Dynamic
Asset €66.5
4% decrease of the dynamic asset in T+1*
* Hypothesis: the zero coupon rate is stable
Risk free asset value€ 20.8
Value of the Dynamic
Asset€ 79.2
Present value of the
guarantee € 80.2
Cushion€19.8
Present value of the guarantee
€ 80.2
Cushion€ 23
Present value of the guarantee
€ 80.2
Cushion€16.6
June 2010 - Page 70
Portfolio Rebalancing 101Please make sure whether you really need portfolio rebalancing
Portfolio Rebalancing 102Please make sure you know all the basics about asset allocation
Portfolio Rebalancing 103Please formulate your view on the target market before you are adopting your
portfolio rebalancing strategiesPortfolio Rebalancing 104
Please make sure whether you know the parameters and the preferred habitat for constant-mix strategyPortfolio Rebalancing 105
Please make sure whether you know the parameters and the preferred habitat for CPPI strategy
Learning Outcome 5
June 2010 - Page 71
Asset allocation can be an active process in varying degrees or strictly passive in nature
Whether an investor chooses a precise asset allocation strategy or a combination of different strategies depends on that investor's goals, age, market expectations and risk tolerance
Keep in mind, however, that this training gives only general guidelines on how investors may use asset allocation as a part of their core strategies
Be aware that allocation approaches that involve anticipating and reacting to market movements require a great deal of expertise and talent in using particular tools for timing these movements
Some would say that accurately timing the market is next to impossible, so make sure your strategy isn't too vulnerable to unforeseeable errors
Conclusion
June 2010 - Page 72
Q & A
Recommended