Asset Allocation

Asset allocation is the process of determining the amount of each asset class (stocks, bonds, real estate investment trusts, and alternatives) to hold in a portfolio. No optimal asset allocation exists, but guidance can be taken from academic literature. Capital Asset Pricing Model (CAPM) is a model that quantifies the relationship between risk and expected returns, which considers risk and return as being determined by the portfolio’s exposure to market beta. A total market index fund is representative of the market portfolio and a portfolio combining Canadian, US, International Developed, and Emerging Market stocks would have improved risk and return characteristics. Model portfolios, including PWL Capital’s and Vanguard’s, have a heavy bias toward Canadian stocks due to their tax treatment. Bonds are less risky than stocks with lower expected returns and Canadian bonds have almost matched the returns of Canadian stocks in the last 30 years with less risk.