26

Sep

More recent research by Brinson, Singer and Beebower has shown that by far the most dominant contributor to the variability of total portfolio returns is the asset allocation of that investment portfolio (that is, the proportion held in shares, property, bonds and cash). According to this seminal study on the subject, asset allocation, on average, accounts for 91.5% of the variation of portfolio returns over time (see the pie chart below). Subsequent studies have realised similarly significant results.

The ideal asset allocation differs from investor to investor and is based on the level of risk each investor is prepared to accept.

Portfolio returns over time

– See more at: http://www2.skandia.co.uk/Adviser/investment-and-funds/Investment/Risk-profiling-and-asset-allocation-tools/Optimised-asset-allocation/Modern-portfolio-theory–building-a-portfolio-unique-to-your-circumstances/#sthash.UJmLMAQY.dpuf

26

Sep

MPT states that portfolios which do not lie on the Efficient Frontier are inefficient (as otherwise you can get higher returns for the same risk). Hence, the asset allocation process should first establish the level of risk to which clients are prepared to expose their investment, and determine a portfolio that lies on the Efficient Frontier.

Efficient Frontier

– See more at: http://www2.skandia.co.uk/Adviser/investment-and-funds/Investment/Risk-profiling-and-asset-allocation-tools/Optimised-asset-allocation/Modern-portfolio-theory–building-a-portfolio-unique-to-your-circumstances/#sthash.UJmLMAQY.dpuf

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