Question

Part A:   Using examples, explain following “ in terms of how these are used for financial planning”.

(30 % of this assignment)

1. Asset allocation
2. Rule of 100
3. Dollar averaging
4. Fund expense ratios
5. Fund Standard deviation
6. Fund Beta
7. Portfolio beta

Answer 1

a. Asset allocation is part of investment strategy where you decide proportion of assets to be allocated to different kinds of assets.Asset allocation is decided based on one's financial goal, risk apetite, returns and liquidity needs.There are different asset allocation strategies like constant weight,dynamic asset allocation etc. Basically asset allocationmeans proportion of investment allocated to stocks, bonds , real estate etc

b.RULE OF 100:It is an asset allocation strategy where the proportion allocated to risky assets like stock should be (100-age)% and balance in fixed income assets like bonds (less risky assets)

This strategy is developed based on the fact that people at younger age can take higher risk. As per this strategy a person at age 30 should invest 70% in stocks and 30% in bonds . A person at age 70 should invest 30% in stocks and remaining in bonds

c.DOLLAR AVERAGING: This is an investment strategy where the investment is done periodically instead of lumpsum purchase. This strategy takes care of volatility in the stock market . During high price, the number of shares received will be less , and during low price it will be high. Overall the cost per share will average out

d.FUND EXPENSE RATIO:Fund expense ratio is the percentage the asset management company charges for managing a mutual fund. For passive or index funds this ratio is lower than the active funds