Asset allocation in portfolio

construction
This chapter examines asset allocation in the context of the
individual investor’s portfolio, with reference to asset class
studies and the key aim of diversification at total portfolio level
 Objectives
• Explain why asset allocation is so important
as a starting point for building a portfolio.

• Describe systematic and non-systematic risk.

• Explain what is meant by capital asset pricing

model (CAPM).
Coherent allocation at total portfolio level

It is important that each individual makes fund

and stock selections based on sound financial
principles and considers asset allocation across
their entire range of investments.
This means maintaining a coherent allocation at
total investment level, rather than regarding
assets held in tax-efficient wrappers such as
pension plans and Individual savings accounts
(ISAs) as separate entities
Investing in collective funds helps to spread
the risk that individual companies will go bust
 Asset allocation studies
- Asset class characteristics
- Diversification overseas
- Capital asset pricing model (CAPM)
- Systematic and non-systematic risk
- The deployment of active management fees
- Efficient markets
- ‘Star’ managers
• Reweighting a portfolio
• Private investor indices
 Summary
This chapter considered some of the
important factors that we should take into
consideration when building a portfolio. Asset
allocation is critical, as this will dictate the risk
reward profile. Model portfolios are a useful
tool and provide benchmark allocations for
investors seeking income, growth or a balance
of the two.
 Performance measurement
and monitoring
This chapter provides a basic guide for
students who want to read and understand
the financial pages, particularly as they appear
in the Financial Times. This will provide the
basic information required to monitor and
measure the progress of individual shares and
collective funds.
 Objectives
• Explain why it is necessary to measure
performance in absolute and relative terms.
• Discuss how shares and funds are classified by
sector.
• Explain how to value shares.
• Describe bonds yield calculations.
 Measurements for performance
• Compare with inflation
• Compare with an index or peer group
 Portfolio Measurement
JCI (Jakarta Composite Index)
• To make a direct comparison with a portfolio.
• To use as the basis for a review of the asset
allocation and structure of a portfolio with the
investment adviser.
• As a benchmark against which we can
compare and assess the performance of
discretionary stockbrokers
• Collective funds
• Periods of measurement
• Guide to reading the financial pages
• = Indonesian Capital Market Directory
 Summary
• This chapter covered the main sources of
performance information for individual shares
and for funds. It analyzed the share and fund
service pages in the Financial Times to show
how to interpret the very condensed
information on prices, price movements, and
yields, among other features.