The Art of Asset Allocation: Principles and Investment Strategies for Any Market, Second Edition Book

Foreword     ix
Preface     xi
Understanding Asset Allocation
Essentials of Asset Allocation     3
Overview     3
Meanings of Asset Allocation     4
Foundations of Asset Allocation     7
The Risks and Rewards of Asset Allocation     10
Principal-Protection Assets and Principal-Growth Assets     16
The Effects of Inflation on Purchasing Power     17
The Asset-Allocation Process     21
Overview     21
Matching Asset Classes with Wealth Levels and Income Needs     22
Types of Asset Allocation     24
Intersections of Asset Allocation with Other Disciplines     33
The Mechanics of Asset Allocation
Asset-Allocation Tools and Concepts     41
Overview     41
Modern Portfolio Theory/Efficient Market Theory     42
Asset and Portfolio Returns     45
Asset and Portfolio Risk     58
Risk and Return     72
Assets' Returns and Correlations Caveats     84
Asset-Allocation Optimization Models     86
Asset-Allocation Optimization Software     93
Asset-Allocation Rebalancing     95
Overview     95
RebalancingPrinciples     96
Advantages and Disadvantages of Rebalancing     97
Origins and Implications of Asset-Allocation Overweighting     100
Scope of Rebalancing     106
Special Considerations Involving Concentrated Positions     108
Rebalancing Methods     115
Asset-Allocation Drift-No Rebalancing     125
Rebalancing Sensitivity Analysis     127
Critical Success Factors in Rebalancing     144
Underpinnings of Asset Allocation
Individual Investor Behavior     151
Overview     151
Factors Affecting Individual Investors' Asset-Allocation Decisions     152
The Evolution of Individual Investors' Asset-Allocation Activity     153
Primary Determinants of Individual Investors' Asset Allocation     157
Strategic and Tactical Principles     162
Individual Investor Behavioral Characteristics     171
Financial Lessons from Market History     178
Insights from Behavioral Finance     182
Asset Class Characteristics
Distinguishing Qualities of Asset Classes     201
Overview     201
Asset Supercategories     202
Evaluating Asset Classes     204
Participants within Asset Classes      206
Asset Classes and Subasset Classes     209
Asset Class Descriptions     211
Asset Class Weightings and Uses     248
Analyzing Assets' Rates of Return     255
Overview     255
Organization of Returns Data     256
Assets' Annual Rates of Return by Groups of Years     257
Assets' Annual Rates of Return by Individual Years     262
Assets' Annual Rates of Return by Economic Environment     281
Rotating Returns Leadership Among Asset Classes     291
Equities Industry Sectors by Individual Years     295
Leading Companies by Equity Market Capitalization     298
Leading U.S. Companies' Rates of Return by Individual Years     302
Financial Markets Analysis and Investment Insights
Constructing an Analytical Framework     309
Overview     309
Societal Analysis     310
Market-Cycle Analysis     312
Scenario Analysis     314
Investor Satisfaction Analysis     317
Strategy Implementation Analysis     321
Comparative Financial Analysis     324
Financial Market Climate Analysis     330
Phases and Cycles in Asset Allocation     334
Tactics and Strategies
Asset-Allocation Matrices and Worksheets     339
Overview     339
Worksheets in the Asset-Allocation Process     340
Asset-Allocation Worksheets in Context     344
Drawbacks of Asset-Allocation Worksheets     346
Asset-Allocation Guidelines     347
Investors' Asset-Allocation Cycles     352
Sequencing of Market Outcomes     354
Asset-Allocation Matrices     358
Investor Profile Worksheet     359
Investment Outlook Worksheet     361
Investment Universe Worksheet     368
Risk Mitigation Matrices     374
Index     387