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ASSET ALLOCATION
101
All rights reserved.
Ula Academics
NOW, INVESTING IS
NOT THAT HARD..
Many get daunted by financial terms; after
all, we see in papers words and acronyms
like SPACs, Gilts, Basis Points, EMEA... But
fret not, we make this digestible and easy;
soon you will be conducting an investment
conversation like a pro .. :-)
WELCOME MESSAGE
LETS GET STARTED
LIST OF CONTENT
PRESENTATION
The 4 you should know. and their
characteristics.
OVERVIEW OF ASSET CLASSES
01
Defining the concept..
RISK AND RETURN
02
How the 4 asset classes can form a
portfolio..
WHAT IS A PORTFOLIO?
03
How one invests in various market
cycles..
MARKET CYCLES
04
05 Final discussion and next steps..
CONCLUSION
THE ‘BIG 4’..
The bill that you have in your wallet? The $10 note? Congratulations if you have it! You
are officially an investor! Think about the $10 USD / AUD / GBP bills that you have and
what it means if you decide to hold the $10 in AUD instead of USD..
Some investors love holding cash in currencies or they invest in products (such as
structured notes - we explain more on this later.. ) that can convert their currencies into
others because they have a need to spend in that country anyhow..
Money Market Securities are cash-like investments that have short maturity (less than a
year typically) such as Certificates of Deposits, Money Market Funds which are considered
safer than your traditional investments like Bonds or Equities..
CASH AND MONEY MARKET SECURITIES
LIQUIDITY LEVEL: 5 *****
THE ‘BIG 4’..
Bonds are considered less volatile than equities but because it is still mainly traded Over the
Counter (as opposed to via a stock exchange)*, it is generally less liquid than equities. It is also
mostly held by institutions such as Insurance Companies that have asset-liability matching
needs and can invest for long periods of time..
Now bonds tend to be boring stuff; high minimum investment, less accessibility but with
improving education and avenues for smaller minimum investments, this may change..
Technicality wise, bonds trade and are quoted based on their par value of 100. All bonds pay a
coupon which can be fixed or floating; usually semi-annually subject to default risk. Bond
holders are higher up the capital structure compared to equity holders in the event of default
which is why they are considered safer.. We discuss more about this subsequently..
*Note that many companies are trying to fractionalize bond trading for retail investors and improve on its liquidity..
BONDS
LIQUIDITY LEVEL: 3 ***
THE ‘BIG 4’..
It is a sunny day and you are bored in the classroom... You tap open a mobile app and
what does it say? ‘ *** Trade’ .. Yes, you are opening the trading application!
Equities have been greatly democratized in recent times.. It is a popular asset class and
usually the first choice of investment for many although penetration rates are still low
globally..
Discussions on equities hinges on its valuation (which in turn is dependent on its
projected cashflow..), peer sector comparisons among others.. Stocks in industries such as
Utilities, Telecommunications are usually less volatile than stocks from sectors such as
Technology, Materials..
We also hear of segregation of equities into VALUE or GROWTH stocks where the former
refers to stocks with low price-to-earnings ratio and are typically considered
UNDERVALUED.. We discuss these further..
EQUITIES
LIQUIDITY LEVEL: 4 ****
THE ‘BIG 4’..
This wouldn’t have been a topic in the past.. And it has the lowest liquidity rating..
Alternative investments refer to all asset classes that are not considered ‘traditional’, and
which are typically less correlated with the main asset classes.. Investors include them in
a portfolio for DIVERSIFIATION benefit..
Investments can include Hedge Funds, Private Equity, Real Estate (physical), Catastrophe
Funds, Art.. Yes, you name it, basically anything that is less correlated with Bonds,
Equities..
Liquidity is usually low because there are usually lock-in periods for investments.. It is not
unusual to hear of lock in periods of 5 to 10 years for Private Equity and Hedge funds may
also have long redemption notices compared to Mutual Funds...
ALTERNATIVE INVESTMENTS
LIQUIDITY LEVEL: 2 **
RISK AND RETURN
Also known as Beta; which is sensitivity of a stock to
broad market risk factor such as the S&P 500 Index..
The higher the beta of the stock, the more volatile it is
compared to the market index... (ie: When S&P 500 moves
up 2%, a stock with a beta of 2 would move up 4%.. )
SYSTEMATIC RISK
This is known as idiosyncratic risk or risk that can be
diversified away.. For instance, risk during earnings
announcement etc..
UNSYSTEMATIC RISK
Now, this is something we have touched upon..
The fundamental building blocks of investing is the
assumption that you get higher returns for higher risk
investments. Investors are supposedly rewarded for taking on
systematic risk (known as BETA)..
TIME OUT!
This is one of the most followed and referenced
equity indices IN THE WORLD because it reflects
the performance of the 500 largest companies
listed in US..
Besides, US is one of the most (if not, the most)
important stock markets in terms of trading
volume, history etc so investors naturally pay
attention to the index as a broad indicator of how
stocks are performing...
STANDARD & POORS 500 INDEX
WHAT IS S&P 500 INDEX?
i.e: Instead of checking how Apple or Google is
performing individually today, one can check how
S&P 500 is performing to get a sense of
broad market performance...
WHAT IS A
PORTFOLIO?
Portfolio management is just for one to manage the
risk-return of the basket of stocks in the portfolio..
While the Return of a Portfolio is a simple sum-
weighted performance of all stocks held inside it, the
computation for Risks of a Portfolio is more
complicated: It takes into account the correlation, and
covariance of assets within the portfolio (ie: If stock
markets crash, would all the assets in this portfolio crash
together? If some assets would not crash (for instance US
Treasuries), the risk of the portfolio is lowered due to this
DIVERSIFICATION EFFECT...
AN EXTENSION..
NOW THAT EVERYONE IS AN EXPERT ON RISK
AND RETURN...
SAMPLE PORTFOLIO
Almost risk-free; instruments such as money
market securities, certificate of deposits
CASH / LIQUIDITY
BONDS / FIXED INCOME
EQUITIES
So Portfolio Construction is a BIG topic... In academics, it is believed that a selection of risky assets
could form the Optimal Risky Portfolio and the allocation to this Optimal Risky Portfolio is then a
matter of individual Risk Aversion and Preferences... However, in reality, Portfolio Construction could
be allocated across Asset Classes with percentage allocation a function of Risk Aversion... (ie: The more
risk averse you are, the older in age you are, the higher the allocation to cash and bonds..)
ALTERNATIVE INVESTMENTS
Slightly higher risk, pays fixed coupon, receive
principal at maturity; government or companie
Higher risk than fixed income; technology stocks
have higher risk than utilities
Diversification benefit; hedge funds, private
equity
15%
15%
35%
35%
SAMPLE BALANCED RISK PROFILE
MARKET CYCLES
2008 Global Financial Crisis
2000 Technology Bubble
1987 Black Monday
Now, you have probably heard of stock market crashes such as the:
SO YOU PROBABLY KNOW, STOCK MARKETS MOVE UP AND
DOWN IN CYCLES AND IT SOMETIMES CRASHES..
However, many are still studying the relationship between Real
Economy and Stock Markets, what causes Stock Market Bubbles,
and what drives prices of assets, but one thing we do know is
despite the booms and crashes, stock market is higher than where it
was decades ago..
CONCLUSION
We have gone through a lot.. ! Hope this
has inspired you to take the learnings
further...
Please visit the next module in this
Investing 101 course.. !
There are 4 main Asset Classes..
LEARNING ONE:
Investing is based on the concept
of Risk and Return
LEARNING TWO:
Portfolio Management is based on
concept of diversification
LEARNING THREE:
Markets move in cycles; with
booms and crashes
LEARNING FOUR:
UNTIL THE NEXT
TIME!
All Rights Reserved.
Ula Academics.
www.ulaacademics.com

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Asset Allocation - An Introduction

  • 1. ASSET ALLOCATION 101 All rights reserved. Ula Academics
  • 2. NOW, INVESTING IS NOT THAT HARD.. Many get daunted by financial terms; after all, we see in papers words and acronyms like SPACs, Gilts, Basis Points, EMEA... But fret not, we make this digestible and easy; soon you will be conducting an investment conversation like a pro .. :-) WELCOME MESSAGE LETS GET STARTED
  • 3. LIST OF CONTENT PRESENTATION The 4 you should know. and their characteristics. OVERVIEW OF ASSET CLASSES 01 Defining the concept.. RISK AND RETURN 02 How the 4 asset classes can form a portfolio.. WHAT IS A PORTFOLIO? 03 How one invests in various market cycles.. MARKET CYCLES 04 05 Final discussion and next steps.. CONCLUSION
  • 4. THE ‘BIG 4’.. The bill that you have in your wallet? The $10 note? Congratulations if you have it! You are officially an investor! Think about the $10 USD / AUD / GBP bills that you have and what it means if you decide to hold the $10 in AUD instead of USD.. Some investors love holding cash in currencies or they invest in products (such as structured notes - we explain more on this later.. ) that can convert their currencies into others because they have a need to spend in that country anyhow.. Money Market Securities are cash-like investments that have short maturity (less than a year typically) such as Certificates of Deposits, Money Market Funds which are considered safer than your traditional investments like Bonds or Equities.. CASH AND MONEY MARKET SECURITIES LIQUIDITY LEVEL: 5 *****
  • 5. THE ‘BIG 4’.. Bonds are considered less volatile than equities but because it is still mainly traded Over the Counter (as opposed to via a stock exchange)*, it is generally less liquid than equities. It is also mostly held by institutions such as Insurance Companies that have asset-liability matching needs and can invest for long periods of time.. Now bonds tend to be boring stuff; high minimum investment, less accessibility but with improving education and avenues for smaller minimum investments, this may change.. Technicality wise, bonds trade and are quoted based on their par value of 100. All bonds pay a coupon which can be fixed or floating; usually semi-annually subject to default risk. Bond holders are higher up the capital structure compared to equity holders in the event of default which is why they are considered safer.. We discuss more about this subsequently.. *Note that many companies are trying to fractionalize bond trading for retail investors and improve on its liquidity.. BONDS LIQUIDITY LEVEL: 3 ***
  • 6. THE ‘BIG 4’.. It is a sunny day and you are bored in the classroom... You tap open a mobile app and what does it say? ‘ *** Trade’ .. Yes, you are opening the trading application! Equities have been greatly democratized in recent times.. It is a popular asset class and usually the first choice of investment for many although penetration rates are still low globally.. Discussions on equities hinges on its valuation (which in turn is dependent on its projected cashflow..), peer sector comparisons among others.. Stocks in industries such as Utilities, Telecommunications are usually less volatile than stocks from sectors such as Technology, Materials.. We also hear of segregation of equities into VALUE or GROWTH stocks where the former refers to stocks with low price-to-earnings ratio and are typically considered UNDERVALUED.. We discuss these further.. EQUITIES LIQUIDITY LEVEL: 4 ****
  • 7. THE ‘BIG 4’.. This wouldn’t have been a topic in the past.. And it has the lowest liquidity rating.. Alternative investments refer to all asset classes that are not considered ‘traditional’, and which are typically less correlated with the main asset classes.. Investors include them in a portfolio for DIVERSIFIATION benefit.. Investments can include Hedge Funds, Private Equity, Real Estate (physical), Catastrophe Funds, Art.. Yes, you name it, basically anything that is less correlated with Bonds, Equities.. Liquidity is usually low because there are usually lock-in periods for investments.. It is not unusual to hear of lock in periods of 5 to 10 years for Private Equity and Hedge funds may also have long redemption notices compared to Mutual Funds... ALTERNATIVE INVESTMENTS LIQUIDITY LEVEL: 2 **
  • 8. RISK AND RETURN Also known as Beta; which is sensitivity of a stock to broad market risk factor such as the S&P 500 Index.. The higher the beta of the stock, the more volatile it is compared to the market index... (ie: When S&P 500 moves up 2%, a stock with a beta of 2 would move up 4%.. ) SYSTEMATIC RISK This is known as idiosyncratic risk or risk that can be diversified away.. For instance, risk during earnings announcement etc.. UNSYSTEMATIC RISK Now, this is something we have touched upon.. The fundamental building blocks of investing is the assumption that you get higher returns for higher risk investments. Investors are supposedly rewarded for taking on systematic risk (known as BETA)..
  • 9. TIME OUT! This is one of the most followed and referenced equity indices IN THE WORLD because it reflects the performance of the 500 largest companies listed in US.. Besides, US is one of the most (if not, the most) important stock markets in terms of trading volume, history etc so investors naturally pay attention to the index as a broad indicator of how stocks are performing... STANDARD & POORS 500 INDEX WHAT IS S&P 500 INDEX? i.e: Instead of checking how Apple or Google is performing individually today, one can check how S&P 500 is performing to get a sense of broad market performance...
  • 10. WHAT IS A PORTFOLIO? Portfolio management is just for one to manage the risk-return of the basket of stocks in the portfolio.. While the Return of a Portfolio is a simple sum- weighted performance of all stocks held inside it, the computation for Risks of a Portfolio is more complicated: It takes into account the correlation, and covariance of assets within the portfolio (ie: If stock markets crash, would all the assets in this portfolio crash together? If some assets would not crash (for instance US Treasuries), the risk of the portfolio is lowered due to this DIVERSIFICATION EFFECT... AN EXTENSION.. NOW THAT EVERYONE IS AN EXPERT ON RISK AND RETURN...
  • 11. SAMPLE PORTFOLIO Almost risk-free; instruments such as money market securities, certificate of deposits CASH / LIQUIDITY BONDS / FIXED INCOME EQUITIES So Portfolio Construction is a BIG topic... In academics, it is believed that a selection of risky assets could form the Optimal Risky Portfolio and the allocation to this Optimal Risky Portfolio is then a matter of individual Risk Aversion and Preferences... However, in reality, Portfolio Construction could be allocated across Asset Classes with percentage allocation a function of Risk Aversion... (ie: The more risk averse you are, the older in age you are, the higher the allocation to cash and bonds..) ALTERNATIVE INVESTMENTS Slightly higher risk, pays fixed coupon, receive principal at maturity; government or companie Higher risk than fixed income; technology stocks have higher risk than utilities Diversification benefit; hedge funds, private equity 15% 15% 35% 35% SAMPLE BALANCED RISK PROFILE
  • 12. MARKET CYCLES 2008 Global Financial Crisis 2000 Technology Bubble 1987 Black Monday Now, you have probably heard of stock market crashes such as the: SO YOU PROBABLY KNOW, STOCK MARKETS MOVE UP AND DOWN IN CYCLES AND IT SOMETIMES CRASHES.. However, many are still studying the relationship between Real Economy and Stock Markets, what causes Stock Market Bubbles, and what drives prices of assets, but one thing we do know is despite the booms and crashes, stock market is higher than where it was decades ago..
  • 13. CONCLUSION We have gone through a lot.. ! Hope this has inspired you to take the learnings further... Please visit the next module in this Investing 101 course.. ! There are 4 main Asset Classes.. LEARNING ONE: Investing is based on the concept of Risk and Return LEARNING TWO: Portfolio Management is based on concept of diversification LEARNING THREE: Markets move in cycles; with booms and crashes LEARNING FOUR:
  • 14. UNTIL THE NEXT TIME! All Rights Reserved. Ula Academics. www.ulaacademics.com