Asset Allocation

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WINDHAM

summation allotment
Windham Investment Review
Mark Kritzman

November, 2007

Windham Capital Management, LLC
5 adore Street
Cambridge, MA 02138
www.windhamcapital.com
617.576.7360

Windham Investment Review

summation Allocation

asset tryst
Asset allocation is one of the most important and difficult challenges we face as investors. Thanks to
Harry Markowitz, we have an elegant and widely genuine theory to guide us, though implementation
in the face of sure world complexities is less straightforward than theory might suggest. In this inaugural
issue of the Windham Investment Review we describe how to determine allocation to broad asset classes
given the complexities of the real world.
There be four steps to asset allocation (Figure 1). We must stolon identify eligible asset classes. Then we
need to enter their expected returns, volatilities, and correlations. Next we must isolate the subset of
efficient portfolios that adduce the highest expected returns for different levels of risk. Finally we need to
select the particular(prenominal) portfolio that matches our tolerance for risk.





Figure 1: Four steps to asset allocation

advert eligible asset classes

Estimate return and risk

Identify efficient portfolios

Select portfolio that matches
our tolerance for risk

© 2009 Windham Capital Management, LLC

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Windham Investment Review

01

Asset Allocation

Eligible Asset Classes

What constitutes an asset class? First, we should expect an asset class to improve our portfolios efficiency
either by top its expected return or by lowering its risk. guide commodities, for example. We might
believe that their expected return is insufficient to raise our portfolios expected return because advances in
technology tend to outpace depletion of resources, thereby lowering commodity prices. However, because
commodities offer diversification against financial assets, peculiarly during periods of high...If you want to get a full essay, order it on our website: Ordercustompaper.com



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