An Integral Approach to Determining Asset Allocations

van Welie, Tom; Janssen, Ronald; Hoogstrate, Monique
January 2004
Journal of Financial Planning;Jan2004, Vol. 17 Issue 1, p50
Academic Journal
This article describes the drawbacks of the sequential approach and introduces an integral approach to determining optimal asset allocations based on clients' objectives and risk tolerance levels. Traditional asset allocation advice was based on information provided by clients in conversations. Many companies and advisors introduced questionnaires as a first step to improve objectivity. This has resulted in an asset allocation advice process. As stated, an important step in asset allocation advice process is determining a client's risk profile. Often, advisors use a generally accepted rule stating that more risk is acceptable if the investment horizon become longer. An advisor determines a client's risk tolerance and selects an asset allocation based on a client's short-term risk profile and investment horizon. Advisors may have to choose from several efficient asset allocations. Simulation models can be used to determine risk. Most simulation models use some simple form of Monte Carlo simulation. INSET: Executive Summary.


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