This document provides an overview of capital markets and portfolio construction from Ferro Financial. It discusses the objectives of understanding capital markets, portfolio construction, diversification, and Ferro's investment philosophy. It defines the stock and bond markets, describing their sizes and complexities. It emphasizes the importance of diversifying among asset classes and within sectors to reduce risk and enhance returns. Modern portfolio theory aims to maximize returns for a given risk level by carefully selecting asset proportions. Successful long-term investing requires a disciplined strategy of diversification and maintaining a long-term view.

1. Ferro Financial, LLC
CLIENT EDUCATION SERIES
MARKET OVERVIEW
SESSION 1
2121 N. Causeway Blvd Suite
160 Ferro Financial, LLC
Metairie, LA 70001

2. Objectives of Presentation
• Provide a Basic Understanding of Capital
Markets
• Discuss Portfolio Construction
• The Importance of Diversifying Among Asset
Classes
• Market Volatility and Long Term Investing
• Ferro Financial, LLC Investment Philosophy

3. Understanding the markets
 Stock
Market
 Bond
Market

4. The Stock Market
World Market Capitalization
$35.6 Trillion as of December 31, 2010
Bloomberg Index Affiliation
 Developed Markets
Capitalization Over Time
 Emerging Markets
($ Trillions):  Frontier Markets

5. The Stock Market
 Own shares in a publicly traded company
 IT IS OWNERSHIP
 Apple Computer, Home Depot, AT&T, GAP
Clothing Store, Exxon
 Why own companies?
 Dividends
 Long term capital growth
 Better than sitting in cash
 Beat rising prices (inflation)

6. The Bond Market
 Size - $95 Trillion vs. $35.6 Trillion Global
Stock Market – MORE THAN TWICE THE
SIZE
 Complexity – Government, Agency,
Corporate, Municipal, Mortgage, Asset-Backed
 Risk – Generally less volatile than stocks

7. The Bond Market
 LENDER
 US Government
 Foreign Government
 Company
 State
 Cities
 Why Lend Money?
 To get your money back + Receive interest

8. Portfolio Construction

9. Asset Categories
Three major asset categories:
 Cash
 Fixed Income
 Stocks
Cash
Fixed Income
Stocks

10. Asset Classes
Asset Class. A group of securities that exhibit similar
characteristics, behave similarly in the marketplace, and are subject to
the same laws and regulations.
Commodities Cash
Real Estate 4% 2%
4%
Emerging Market Stocks
4%
Short Term US Bonds
19%
International Developed
Stocks
14%
International Developed
US Small Cap Stocks Bonds
10% 14%
Emerging Market Bonds
US Large Cap Stocks 5%
24%

11. Table of Periodic Returns

12. Reducing Volatility with Bonds
Instead of eliminating riskier asset classes such
as stocks; invest more of the portfolio in bonds
to reduce volatility.
Stocks Bonds

13. In Portfolio Construction…
 How asset classes work together is more
important than how the components work
individually.
 Objective in portfolio construction - Enhance
the overall performance of the portfolio, and
reduce the downside risk.

14. Market Returns with Downside
%Cash % Bonds % Stocks Avg. Return
8% 64% 28% 8.07%
8% 54% 38% 8.34%
4% 51% 45% 8.57%
5% 40% 55% 8.81%
4% 35% 61% 9.00%
4% 24% 72% 9.26%
2% 16% 82% 9.54%
0% 9% 91% 9.82%
0% 0% 100% 10.03%
• Time Period – 1/1970 to 12/2011
• Return Information provided by the software MoneyGuide Pro

15. Market Returns with Downside
%Cash % Bonds % Stocks Avg. Return Worst 1 Yr
Loss
8% 64% 28% 8.07% -4.23%
8% 54% 38% 8.34% -9.05%
4% 51% 45% 8.57% -12.33%
5% 40% 55% 8.81% -17.40%
4% 35% 61% 9.00% -20.40%
4% 24% 72% 9.26% -25.80%
2% 16% 82% 9.54% -30.46%
0% 9% 91% 9.82% -34.68%
0% 0% 100% 10.03% -39.41%
• Time Period – 1/1970 to 12/2011
• Return Information provided by the software MoneyGuide Pro

16. How Diversification Works
 Number of stocks that are held within an asset
class
 Number of bonds held within a maturity period
 Diversifying across asset classes
 Diversifying within the sectors of the economy

17. Diversifying Bonds
Short Term Bonds
Intermediate Term Bonds
Long Term Bonds

18. Diversifying Stocks
Financial Stocks
Technology Stocks
Utilities
Energy Stocks
Healthcare
Consumer Durables
Industrial

19. Diversified Portfolio
Sample Portfolio
7% 8%
7%
Cash
22%
Short Term Bonds
Intermediate Term
Bonds
40% Large Companies
16%

20. Investment philosophy

21. Modern Portfolio Theory
Modern Portfolio Theory (MPT) was introduced
by Nobel prize winner, Harry Markowitz in 1952.
MPT attempts to maximize portfolio expected return for a given
amount of portfolio risk by carefully choosing the proportions of various
asset classes.
The fundamental concept behind MPT is that the assets in a portfolio
should NOT be selected individually, each on their own merits.
Rather, it is important to consider how each asset changes relative to
every other asset in the portfolio.

22. Investment management
strategies

23. Active versus Passive
Management
Active Management Passive Management
 Manager tries to beat the  Manager tries to match the
market return of the market
 High turnover – tax  Low turnover – tax efficiency
inefficiency  Low expense ratio
 High expense ratio  Low transaction costs – trade
 High transaction costs – lots only to accommodate fund
of trading flows

24. Strategic versus Tactical
Strategic Management Tactical Management
 Long-term focus  Short-term focus
 Select mix of  Change mix of
investments and investments based on
maintain mix predictions and
 Remain disciplined forecasts
despite markets ups  React to market
and downs movements by
 Rebalance to target mix changing mix
as market moves up  Success depends on
and down ability to predict market
 Changes based on life- movements
time events

25. Investment Products
Mutual Funds
Exchange Traded Funds
Certificates of Deposit
Government Bonds

26. Summary
Successful Long Term Investing:
Have an Investment Strategy that is Based on a Disciplined
Process:
Diversify among different Asset Classes
Use Diversified Securities
Diversification among different segments of the overall economy
Keep a long term time horizon

27. Ferro Financial, LLC
“PLANNING TODAY FOR
THE LIVE YOU’LL LIVE TOMORROW”
2121 N. Causeway Blvd Suite
160 Ferro Financial, LLC
Metairie, LA 70001