Page 252 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 9: Portfolio Management

Notes
Figure 9.2

Notes It's no secret that throughout history common stock has outperformed most financial
instruments. If an investor plans to have an investment for a long period of time, his or her
portfolio should be comprised mostly of stocks. Investors who don't have this kind of
time should diversify their portfolios by including investments other than stocks.
For this reason, the concept of asset allocation was developed. Asset allocation is an
investment portfolio technique that aims to balance risk and create diversification by
dividing assets among major categories such as bonds, stocks, real estate, and cash. Each
asset class has different levels of return and risk, so each will behave differently over time.
At the same time, that one asset is increasing in value, another may be decreasing or not
increasing as much.
The underlying principle of asset allocation is that the older a person gets, the less risk he
or she should take on. After you retire, you may have to depend on your savings as your
only source of income. It follows that you should invest more conservatively because
asset preservation is crucial at this time in life.
Determining the proper mix of investments in your portfolio is extremely important.
Deciding what percentage of your portfolio you should put into stocks, mutual funds, and
low risk instruments like bonds and treasuries isn't simple, particularly for those reaching
retirement age. Imagine saving for 30 or more years only to see the stock market decline
in the years before your retirement.

9.4 Portfolio Strategies

Passive
One of the most profound ideas affecting the investment decision process, and indeed all of
finance, is the idea that the securities markets, particularly the equity markets, are efficient. In an
efficient market, the prices of securities do not depart for any length of time from the justified
economic values that investors calculate for them. Economic values for securities are determined

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