Asset Allocation %

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sachin_patel

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Reading 18 Example 21
Global equities 70%
Canadian equities 30%
US equities 30
European equities 10
Global fixed income 30%
Canadian bonds 20
US bonds 10
  1. Calculate the long-term and short-term return expectations for global equities (A and B, respectively) and global fixed income (C and D, respectively).

A=(0.4286×10%)+(0.4286×8%)+(0.1429×7%)=  8.7143%,or8.71%B=(0.4286×12%)+(0.4286×8%)+(0.1429×7%)=  9.5714%,or9.57%
Solution to 1:
Canadian equities, US equities, and European equities represent respectively 30%/70% = 0.4286, 30%/70% = 0.4286, and 10%/70% = 0.1429 of global equities. Therefore, for global equities,
A=(0.4286×10%)+(0.4286×8%)+(0.1429×7%)=  8.7143%,or8.71%B=(0.4286×12%)+(0.4286×8%)+(0.1429×7%)=  9.5714%,or9.57%
Why is the book calculating individual equity as percentage of equity?
the percentages given to individual equity classes are as percentage of portfolio and add up to 100%
 
Becuase question asks each asset class (global equities and global fixed income) expected return.
Q:
  1. Calculate the long-term and short-term return expectations for global equities (A and B, respectively) and global fixed income (C and D, respectively).
 
A (long term global equity) = 10%*(0.3) + 8%*(0.3) + 7%*(0.1) = 6.1%
what’s wrong with my calculation? its different from their number which is 8.71%
 
your number is wrong because US equity = 30/70 proportion. (similar for the others)
 
how are my numbers wrong? let me explain my thinking.
Lets ignore Global Equities and global fixed income lines..thats just aggregating the individual equities.
in that case our portfolio contains
Canadian equities 30%
US equities 30
European equities 10
Canadian bonds 20
US bonds 10
Total 100%
my return calculation of equities is weighted avg of individual equities
which is 10%*(0.3) + 8%*(0.3) + 7%*(0.1) = 6.1%
 
look at it
it is a total of 70% equity - which is split directly as 30/30/10 between the 3.
so US Equities proportion = 30/70 …. 0.4286
and not 30% as you have.
=========
So 70/30 between Global Equity/Global Fixed Income
and 70 is split up as 30/30/10 ….
you will also see another pattern (in the same chapter)
70/30 split between the global equity/global fixed income
and then US/Eur/Canada - sum up internally to 100% –> e.g. 50,40,10 - > then US = 35% (70% * 50%), EUR=28%, and Canada = 7% (And 35+28+7=70)
 
Ok Finally I got it..
according to my calculation, if 70% allocation to equity gives me 6.1% then 100% would give me 6.1/0.7 = 8.71%
Thanks CPK!
 
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