Investment Presentation

1
Investment Presentation

• By
• Professor David M. Sinow
• University of Illinois

2
Investing Overview

• What makes a difference when you invest?

• Equities vs. Fixed Income
• Volatility Is Your Enemy
• Longer Term Fixed Income Investments Are Too
  Risky
• Three Factor Model
• Asset Allocation The Real Key to Investing
• Daves Couch Potato Portfolio

3
Asset Class Performance 1925-1996
4
Volatility is Your Enemy!!!!
Assume I invest 100.00 for one year earn 0 at
the end of year 1. Assume that the following
year I invest the 100.00 and earn 0 again. My
average return is 0. Now Assume that you invest
100.00 for one year and earn 50 at the end of
year 1. Assume the following year you invest
150.00 and your second year rate of return is a
50. We each had an average rate of return of
0 over the two year period.
5
But.Who has more money at the end of the 2
years???? A) Me B) You
MORAL OF THE STORY VOLATILITY KILLS PORTFOLIOS
IN DOWN YEARSBECAUSE YOU LOSE A GREATER
PERCENTAGE OF YOUR GAINS FROM PREVIOUS YEARS!!!!
6
Risk/Reward Does it Pay to Extend Maturities?
1964-1994
()
Long maturity instruments are riskier. Returns
for longer maturity instruments are not
consistently greater. Alternative strategies are
needed to enhance returns.
Annualized Return () 6.56 7.43 7.53 7.70 6.89
Annualized Standard Deviation 1.32 1.64 2.16 6.68 11.50
7
Three Elements That Determine the Majority of an
Equity Funds Expected Return
5.86
Average Annual Returns 1964-1996
5.13
3.58
Size Factor Small Stocks Minus Large Stocks
Market Factor All-Equity Universe Minus T-bills
Style Factor Out-of-Favor Companies Minus
Glamour Companies
8
Porfolio 1 A Basic Portfolio Passively Invested
Expected Return Standard Deviation
Portfolio 1 13.6 10.3
60 SP 500 Index
40 Lehman Gov/Corp. Index
9
Porfolio 2 A Basic Portfolio Substituting
Short-Term Fixed Income for Long-Term Fixed Income
Expected Return Standard Deviation
Portfolio 1 13.6 10.3
Portfolio 2 13.3 8.6
60 SP 500 Index
40 1-yr Fixed Income
10
Porfolio 3 A Basic Portfolio Balancing
Equities, S P, and US Small Cap Index
Expected Return Standard Deviation
Portfolio 1 13.6 10.3
Portfolio 2 13.3 8.6
Portfolio 3 14.9 9.9
30 SP 500 Index
40 1-yr Fixed Income
30 Small Cap
11
Porfolio 4 A Basic Portfolio Balancing US
Small Cap Value, US Small Cap, US Large Value,
and SP 500 Index
Expected Return Standard Deviation
Portfolio 1 13.6 10.3
Portfolio 2 13.3 8.6
Portfolio 3 14.9 9.9
Portfolio 4 15.7 9.8
15 Small Cap
15 SP 500 Index
15 Small Cap Value
40 1-yr Fixed Inc.
15 US Large Co. Value
12
Porfolio 5 A Basic Portfolio Adding
International Diversification
Expected Return Standard Deviation
Portfolio 1 13.6 10.3
Portfolio 2 13.3 8.6
Portfolio 3 14.9 9.9
Portfolio 4 15.7 9.8
Portfolio 5 16.6 9.1
7.5 SP 500
7.5 US Large Co. Value
7.5 US Small Cap
40 1-yr Fixed Inc
7.5 US Small Cap Value
15 Intl Small Value
15 Intl Large Value
13
DAVES COUCH POTATO PORTFOLIO
Asset Class Percentage Invested
1 SP 500 10
2 US Large Value 16.5
3 US Small Cap 10
4 US Small Cap Value 16.5
5 US Mid-Caps 10
6 US REIT 7
7 Total International 25
8 Emerging Markets 5
Total 100