About Me
Chartered Financial Analyst (CFA)
1 Ethical and Professional Standards
1-1 Code of Ethics
1-2 Standards of Professional Conduct
1-3 Guidance for Standards I-VII
1-4 Introduction to the Global Investment Performance Standards (GIPS)
1-5 Application of the Code and Standards
2 Quantitative Methods
2-1 Time Value of Money
2-2 Discounted Cash Flow Applications
2-3 Statistical Concepts and Market Returns
2-4 Probability Concepts
2-5 Common Probability Distributions
2-6 Sampling and Estimation
2-7 Hypothesis Testing
2-8 Technical Analysis
3 Economics
3-1 Topics in Demand and Supply Analysis
3-2 The Firm and Market Structures
3-3 Aggregate Output, Prices, and Economic Growth
3-4 Understanding Business Cycles
3-5 Monetary and Fiscal Policy
3-6 International Trade and Capital Flows
3-7 Currency Exchange Rates
4 Financial Statement Analysis
4-1 Financial Reporting Mechanism
4-2 Income Statements, Balance Sheets, and Cash Flow Statements
4-3 Financial Reporting Standards
4-4 Analysis of Financial Statements
4-5 Inventories
4-6 Long-Lived Assets
4-7 Income Taxes
4-8 Non-Current (Long-term) Liabilities
4-9 Financial Reporting Quality
4-10 Financial Analysis Techniques
4-11 Evaluating Financial Reporting Quality
5 Corporate Finance
5-1 Capital Budgeting
5-2 Cost of Capital
5-3 Measures of Leverage
5-4 Dividends and Share Repurchases
5-5 Corporate Governance and ESG Considerations
6 Equity Investments
6-1 Market Organization and Structure
6-2 Security Market Indices
6-3 Overview of Equity Securities
6-4 Industry and Company Analysis
6-5 Equity Valuation: Concepts and Basic Tools
6-6 Equity Valuation: Applications and Processes
7 Fixed Income
7-1 Fixed-Income Securities: Defining Elements
7-2 Fixed-Income Markets: Issuance, Trading, and Funding
7-3 Introduction to the Valuation of Fixed-Income Securities
7-4 Understanding Yield Spreads
7-5 Fundamentals of Credit Analysis
8 Derivatives
8-1 Derivative Markets and Instruments
8-2 Pricing and Valuation of Forward Commitments
8-3 Valuation of Contingent Claims
9 Alternative Investments
9-1 Alternative Investments Overview
9-2 Risk Management Applications of Alternative Investments
9-3 Private Equity Investments
9-4 Real Estate Investments
9-5 Commodities
9-6 Infrastructure Investments
9-7 Hedge Funds
10 Portfolio Management and Wealth Planning
10-1 Portfolio Management: An Overview
10-2 Investment Policy Statement (IPS)
10-3 Asset Allocation
10-4 Basics of Portfolio Planning and Construction
10-5 Risk Management in the Portfolio Context
10-6 Monitoring and Rebalancing
10-7 Global Investment Performance Standards (GIPS)
10-8 Introduction to the Wealth Management Process
10.3 Asset Allocation Explained

10.3 Asset Allocation - 10.3 Asset Allocation

Key Concepts

Asset Allocation

Asset Allocation is the process of distributing a portfolio's investments across various asset classes such as stocks, bonds, real estate, and cash. The goal is to balance risk and reward based on an individual's financial goals, risk tolerance, and investment horizon.

Example: A young investor with a long-term horizon might allocate 70% of their portfolio to stocks for growth potential, 20% to bonds for income, and 10% to cash for liquidity.

Diversification

Diversification involves spreading investments across different asset classes and sectors to reduce risk. By not putting all your eggs in one basket, you can mitigate the impact of poor performance in any single investment.

Example: Instead of investing all your money in technology stocks, you might diversify by also investing in healthcare, consumer goods, and energy stocks to reduce sector-specific risk.

Risk Tolerance

Risk Tolerance is an investor's ability and willingness to withstand fluctuations in the value of their investments. It is influenced by factors such as age, financial stability, and investment goals. Higher risk tolerance typically allows for more aggressive asset allocation.

Example: A retiree with limited income sources might have a lower risk tolerance and prefer a portfolio with a higher allocation to bonds and cash to preserve capital.

Time Horizon

Time Horizon refers to the length of time an investor plans to hold their investments before needing the funds. Longer time horizons generally allow for more aggressive investments, as there is more time to recover from market downturns.

Example: A 30-year-old planning to retire at 65 has a longer time horizon and can afford to invest more in stocks, which may experience higher volatility but offer greater growth potential over time.

Rebalancing

Rebalancing involves periodically adjusting the portfolio to maintain the desired asset allocation. This is necessary because the relative performance of different asset classes can cause the portfolio to drift from its original allocation.

Example: If a portfolio initially allocated 60% to stocks and 40% to bonds, but stocks perform well and now represent 70% of the portfolio, the investor might sell some stocks and buy bonds to restore the original 60/40 split.

Strategic vs. Tactical Asset Allocation

Strategic Asset Allocation is a long-term approach that involves setting a fixed target for each asset class based on an investor's goals and risk tolerance. Tactical Asset Allocation, on the other hand, involves making short-term adjustments to capitalize on market opportunities or mitigate risks.

Example: A strategic asset allocation might maintain a 60% stock and 40% bond portfolio regardless of market conditions. In contrast, a tactical asset allocation might increase the stock allocation to 70% during a bull market and reduce it to 50% during a bear market.

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