...Asset Allocation and Regret Theory Assume that there is NO exchange rate risk. You are managing an equity MPF in Hong Kong and wonder about your global asset allocation. You believe that foreign markets will outperform HK, but nothing is sure. You do a mean variance optimization and find that you should allocate 80% abroad. You know that the theory of the CAPM tells you to allocate according to market capitalization weights; hence you should invest more than 95% in non-Hong Kong equity. On the other hand you observed the standard of MPF in Hong Kong is only to invest 40% abroad (average over all equity MPFs). Note, that there is no RIGHT answer. Please consider that you are writing a short memo to your investment committee. a. In the absence of specific expectations about returns in Hong Kong or abroad, what would regret theory suggest as global asset allocation? b. Given all the information above, what will you choose as a percentage of asset allocation and why? c. You decide to forget about regret and simply try to obtain the best risk-adjusted return. Actually your own expectation is quite bullish about China and Hong Kong but you know that any forecast is uncertain. But you expect Hong Kong to outperform the rest of the world by some 2% (12% instead of 10%). Hong Kong sigma is 20% while that of the MSCI World index (excluding Hong Kong) is only 15% with a correlation of 0.5. You desire that the volatility (sigma) of your portfolio be no more than 15%. How would...
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...Team 2: Defend the asset/liability approach of accounting for inter-period income tax allocation. The asset/liability method of income tax allocation is balance sheet oriented. The intent is to accrue and report the total tax benefit or taxes payable that will actually be realized or assessed on temporary differences when their respective future taxable or deductible amounts are expected to occur. The book states 5 arguments: 1. The balance sheet is becoming more important financial statement. Reporting deferred taxes based on the expected tax rates when the temporary differences reverse increases the predictive value of future cash flows, liquidity, and financial flexibility. 2. Reporting deferred taxes based on the expected tax rates is conceptually more sound because the reported amount represents either the likely future economic sacrifice (future tax payment) or economic benefit (future reduction in taxes). 3. Deferred taxes may be the result of historical transactions, but, by definition, they are taxes that are postponed and will be paid (or will reduce taxes) in the future at the future tax rates. 4. Estimates are used extensively in accounting. The use of estimated future tax rates for deferred taxes poses no more of a problem regarding verifiability and reliability than using, say, estimated lives for depreciation. 5. Because the tax expense results from changes in balance sheet values, its measurement is consistent with the SFAC No. 6 and SFAS...
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...decision to strongly emphasize in real returns. The focus point in the third part is to highlight the method of generation of an efficiency frontier and the advantage and drawbacks of the constraining portfolio weights. And finally, the most significant part we will discuss the beneficial and hammering consequences of considering TIPS as an additional asset class in Harvard’s policy portfolio. 1. the advantages and limitations of optimal portfolio allocations: Led primarily by the need to balance between the requirements posed by the nature of its sector, and its above the ground ambitions for success, Harvard Management Co. introduced the concept of the Optimal Portfolio Allocation as a primary method through which they approach the process of maximization of their risk/return utility function. One of the advantages of this process is the high extent to which this asset allocation alternative meets the nature and needs of this institution. Another essential advantage derives from the fact that through the systematic distribution of the weights determined by the implication of mean-variance analysis for all available assets, the supreme management of the enterprise improves his diversification on the basis of correlations and its capability to forecast the future performance from a long-run perspective. Nevertheless, this analysis would not be complete without the elaborations of the drawbacks accompanying the...
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...9-201-129 REV: OCTOBER 23, 2001 Harvard Management Company (2001) In February 2001, Jack Meyer gazed out of his fifteenth floor office window at a cold Boston Harbor and reflected on the set of issues facing Harvard Management Company (HMC). The HMC Board would soon be reviewing the Policy Portfolio – the long-term asset mix that was designed to balance Harvard’s aversion to risk against its needs for long-term endowment returns. The Policy Portfolio was the cornerstone of endowment management at Harvard, the “neutral” portfolio mix that anchored the central tendency of actual asset allocations over time, as well as the benchmark against which actual performance was measured and incentive compensation was calculated. The Board was also interested in a variety of related issues, including the complexity of the investment strategies employed, the effectiveness of their risk controls, and the design and administration of their compensation systems. The Role of the Endowment Harvard University had been founded in 1636, and from the beginning its endowment played an important role in the financial structure of the institution. As of June 2000, the endowment managed by HMC totaled approximately $18.2 billion. Each of the various schools within the University owned “units” in the endowment, much like an individual would own shares in a mutual fund. Spending from the endowment was distributed pro-rata to all schools on the basis of the units each school owned. The annual spending from...
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...Ivey Cases https://www.iveycases.com/RegisterUser.aspx o Put the following two cases studies in your cart. Make sure Digital Download is selected which will cost $3.40 per case. o Burgundy Asset Management: The Wescast Investment Decision https://www.iveycases.com/ProductView.aspx?id=31479 o Valuing Wal-mart 2010 https://www.iveycases.com/ProductView.aspx?id=48332 o Download the Wal-mart case spreadsheet for free. o Valuing Wal-mart 2010 – Spreadsheet for students https://www.iveycases.com/ProductView.aspx?id=52705 Case Report Guidelines 1. Place case title at top of first page with team member names (maximum four members per team). 2. Answer questions in numerical order. 3. Include graphs and tables if appropriate. 4. Print out case report and hand-in at the beginning of class. Harvard Management Company (2001) Questions 1. Is HMC’s recent payout policy consistent with the goal of preserving the real (adjusted for Harvard’s expense growth) value of the endowment and its distribution into perpetuity? 2. Could payout be raised to meet recent budget pressures without changing the risk-return profile of the portfolio? 3. What value has the HMC’s policy portfolio asset allocations (compared to TUCS median) added to the endowment from the period 1992-2000? 4. What value has active portfolio management (deviating from the policy portfolio indexes and weights) added to the endowment from...
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...Beta Management Company July 21, 2014 Variable Measures | |Vanguard Index 500 Trust |California R.E.I.T. |Brown Group | |Standard Deviation |4.61% |9.23% |8.17% | |Expected Return |1.10% |-2.27% |-0.67% | | |Vanguard & California R.E.I.T. |Vanguard & Brown Group | |Beta |14.121% |111.488% | |Correlation Coefficient |0.0735 |0.6562 | In evaluating the risk characteristics on a stand-alone basis, we can conclude that Brown Group offers a better return than California R.E.I.T. as well as a more stable standard deviation. When considering standard deviation as a measure of risk, the higher the deviation, the higher the risk that exists. Although the expected return for both Brown Group and California R.E.I.T. are both negative, Brown Groups expected return of -0.67%, in addition to its lower standard deviation than that of California...
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...LEARNING OUTCOMES LEARNING OUTCOMES Program: Master in Wealth Management Professor: Georges Hübner Title of course: Personal Portfolio Management ECTS Credits (teaching days): 3 Learning Objectives: * Consider the client from the point of view of his/her preferences for risk and return * Determine the risk and return of various asset classes and explain where the risk premium comes from * Understand and master the notion of risk factors and how they explain portfolio returns * Master the Equity Risk Premium and be able to discuss its determinants and evolution * Understand the basics of prospect theory and its influences on the PB client * Link the MiFID “suitability” criterion to investor profiles and identify their dimensions * Identify and avoid the pitfalls in portfolio advice * Go beyond the notions of strategic and tactical asset allocation to better serve the client * Include the investor’s objectives and constraints in the portfolio construction process * Adequately report portfolio performance and explain it is a clear fashion to investors * Adapt the measurement of portfolio performance to the preferences of the investor * Distinguish the types of managerial skills that generate the portfolio returns Topics covered: 1. Personal Portfolio Management I A. Investors’ preferences, risk and return 1. The notion of risk and the risk premium 2. Classical view of investors’ preferences ...
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...returns: implications for portfolio allocation by Marco Lombardi and Francesco Ravazzolo Monetary and Economic Department July 2013 JEL classification: C11, C15, C53, E17, G17. Keywords: Commodity prices, equity prices, density forecasting, correlation, Bayesian DCC. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2013. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISBN 1682-7678 (online) On the correlation between commodity and equity returns: implications for portfolio allocation∗ Marco J. Lombardi† Francesco Ravazzolo‡ July 11, 2013 Abstract In the recent years several commentators hinted at an increase of the correlation between equity and commodity prices, and blamed investment in commodity-related products for this. First, this paper investigates such claims by looking at various measures of correlation. Next, we assess what are the implications of higher correlations between oil and equity prices for asset allocation. We develop a time-varying Bayesian...
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...Los Angeles CA 90041 323-254-3072 eekim@cwmason.com Cover Pages Cover Pages Table of Contents Introduction Client Information Statement of Objectives Risk Profile Current Accounts Current Allocation Constraints Miscellaneous Expenses Asset Allocation Current vs. Target Allocation Investments Investment Evaluation & Selection Proposed Portfolio Investment Strategy Analysises Allocation Comparison Equity Investment Style U.S. Stock Sector Analysis Regional Exposure Fixed-Income Investment Style Credit Quality Interest-Rate Risk Mutual Fund Fees and Expenses Performance Risk and Return Statistics MPT Statistics Implementation Plan Action Plan Monitoring Your Progress Legal & Regulatory Agreement Appendices 1 2 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 6 6 7 7 7 7 7 7 8 8 8 8 9 9 9 9 10 Planning Reports Appendices Performance of Proposed Securities Risk Tolerance Questionnaire Data as of 3/30/2009 Page 3 of 10 John Doe IRA Investment Policy Statement Introduction The Investment Recommendation is a detailed list of the changes recommended to your current portfolio holdings. The recommended list of funds, stocks, and/or other investments has been selected in order to implement a new asset allocation policy with either a higher potential return than your current allocation, a lower level of risk, or a combination of both. This report also provides a high-level analysis to help you understand the overall effects of the recommendations on your equity and fixed-income...
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...ARTICLE ADVANCE AGE WISE ASSETS ALLOCATION METHOD - Nikhil Srivastava Age plays a crucial role in our life. As our age increases, our life decreases. It implies that age and life of a person have negative correlation. We know that life of a human being is divided into four stages namely childhood, adolescence, youth and old age. In childhood and adolescence we have more desires which we are governed by, whereas in matured and older age we have more needs and we work for fulfillment of the same. When a person is ruled by desires, he has more enthusiasm but when he works for his needs, he is not much energetic. For example, at a younger age we like to play and we play without being afraid of injuries because at that age human body has good resistance power and injuries get cured easily. But as we grow in age we avoid playing, though games lure us but we don't like to take any risk of getting injured. This is human nature. It is now obvious that when we are grown up, there is loss of energy and self confidence. This human behavior is evident in a person's investment strategies as well. In early part of our earning life we usually invest more in shares in comparison to debt market. But as our age increases we invest more in debt and less in equity, because now we invest for fulfillment of our needs, rather our desire and when a person invests for his needs he doesn't want to take any risk. This is logically true, because as person grows his risk tolerance level decreases. Let's see...
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...Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes Niels Bekkers Mars The Netherlands Ronald Q. Doeswijk* Robeco The Netherlands Trevin W. Lam Rabobank The Netherlands October 2009 Abstract This study explores which asset classes add value to a traditional portfolio of stocks, bonds and cash. Next, we determine the optimal weights of all asset classes in the optimal portfolio. This study adds to the literature by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. We also demonstrate how to combine these two methods. Our results suggest that real estate, commodities and high yield add most value to the traditional asset mix. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio. JEL classification: G11, G12 Key words: strategic asset allocation, capital market expectations, mean-variance analysis, optimal portfolio, global market portfolio. This study has benefited from the support and practical comments provided by Jeroen Beimer, Léon Cornelissen, Lex Hoogduin, Menno Meekel, Léon Muller, Laurens Swinkels and Pim van Vliet. Special thanks go to Jeroen Blokland and Rolf Hermans for many extensive and valuable discussions. We thank Peter Hobbs for providing the detailed segmentation...
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...Process It was a relatively quiet year on the glide path front—at least as far as major equity/fixed-income changes go. It appears likely that the series stung by poor asset allocation in 2008’s market crash have already implemented subsequent changes. Thus, there is only minimal difference in the series’ 2010 and 2011 asset allocations. Target allocations in further detail by target year, illustrating trends Morningstar has observed for the past several years. Longer-dated funds from target-date 2040 onward (several firms now offer 2060 funds) show little substantive difference in their average equity allocation, which ranges from 87% to 92%. The range of allocations in long-dated funds look wider for many of the subsequent target years due to the Invesco series’ unusual structure, which involves levering up its bond holdings. Invesco doesn’t offer a 2055 fund, so the range of equity allocations extends from 85% to 100%. Certainly, there is a meaningful difference in equity risk between these allocation points, but it’s not extreme. Even at 85% in stocks, investors have heavy exposure to equities, with many years left to ride out periodic short-term losses. Such a vast gap reflects the divergent philosophies regarding how long investors are expected to remain invested in target-date funds (that is, should they remain invested after they enter retirement or reallocate into other vehicles when they retire) and thus the appropriate weighting in stocks when they retire. These...
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...Proceeds and Affects from the Loan The Tootsie Roll Industries, Inc. has chosen to allocate the funds from the loan to critical departments that will contribute to the growth of the company. The loan will permit Tootsie Roll to acquire new updated equipment for better production such as robotics to increase productivity. The allocation of these funds will open up research, and development, to produce healthier and cheaper ingredients for products. However, acquiring new robotic production machines or equipment will require a decrease in manpower, wages, and salaries. Approval of the loan will positively affect Tootsie Roll by the way products are manufactured and distributed. The loan acquisition will increase the productivity of the company because of the acquisition of new assets to benefit production. Through the downturn in the economy, Tootsie Roll Industries, Inc. has adjusted product prices or package weights to offset the higher costs (Kimmel, Weygandt, & Kieso, 2011). During the first quarter of 2009, the Tootsie Roll Industries, Inc. adopted the authoritative guidance for disclosures about hedging activities derivative instruments. It requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of derivative instruments, and related gains and losses (Kimmel, Weygandt, & Kieso, 2011). It also required disclosures about related credit-risk features in derivative agreements (Kimmel...
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............................ 5 3.2. Utilitarianism ............................................................................................................................... 5 3.3. Ethical Realism (as espoused by Reinhold Niebuhr) (the lesser of two evils) ............................ 5 4. Approaches that can be followed to resolve these dilemmas and Issues ............................................ 6 References .............................................................................................................................................. 7 Bibliography .......................................................................................................................................... 7 1|Page INDIAN COAL ALLOCATION SCAM 1 .Major Ethical issues Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private companies. After coal nationalisation in 1973, public sector Coal India Limited (CIL) was accorded sole rights to extract coal. But CIL has been failing to supply coal in the required quantities to end-users (particularly in the...
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...Practice set for Chapters 15 and 16 1) The single-rate cost-allocation method may base the denominator choice on: A) master-budget capacity utilization B) normal capacity utilization C) practical capacity D) All of these answers are correct. 2) Benefits of the single-rate method include: A) the low cost of implementation B) fixed costs that are transformed into variable costs for user decision making C) signals regarding how variable and fixed costs behave differently D) information that leads to outsourcing decisions that benefit the organization as a whole 3) Benefits of the dual-rate method include: A) variable costs that are transformed into fixed costs for user decision making B) the low cost of implementation C) avoidance of expensive analysis for categorizing costs as either fixed or variable D) information that leads to outsourcing decisions that benefit the organization as a whole 4)The advantage of using practical capacity to allocate costs: A) is that it allows a downward demand spiral to develop B) is that it focuses management's attention on managing unused capacity C) is that budgets are much easier to develop D) Either A or B are correct. Answer the following questions using the information below: The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget...
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