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Instructions say the article and excel are necessary to provide statistics on the two funds mentioned in the article as well as a fund that

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedInstructions say the article and excel are necessary to provide statistics on the two funds mentioned in the article as well as a fund that simply buys gold, a domestic stock index fund that tracks the S&P 500, and a global stock mutual fund that tracks an index of global securities.

1) Long-term Treasury Bonds with a 10-year maturity are currently yielding about 0.70%, the lowest yields in many decades. Stocks on average have an annual return of around 10%. Why would anyone add long-term Treasury bonds to a stock portfolio? 2) Why does the Eaton Vance Richard Bernstein All Asset Strategy Fund (EARAX) have the lowest standard deviation among the funds? 3) If you were building your own portfolio, would you use gold as a diversifier? Explain your answer. 4) If you were given $1,000,000 to buy into any combination of the 5 funds in the spreadsheet, which allocation would you choose, based on your risk/return preferences? Calculate your weighted average portfolio return and portfolio beta based on the historical 5-year annualized returns. Article Highlights - It's not the number of assets that determines diversification; it's the correlation among them. - Diversifying means buying asset classes you don't like in order to insure against your assumptions being wrong. - The profit cycle is the driver of investment styles. When the profit cycle revs up, you want to take on more risk. quarter or do it every six months. Pick have an optimal combination of yield the U.S. issues aren't happening in the a date in your calendar and circle it and and capital appreciation. Some people United States; rather, they are happening that's the day you're going to rebalance. say, 'What do I live off of, if I don't have in emerging markets. That is probably You're not going to rebalance in between. this yield?' Well, wait a minute-let's where the risk is, but most people still think like a pension or an endowment don't appreciate the risks in emerging CR: What about yield? Yield, especially for a second. An endowment spins off markets. for our retired members, is a big issue-trying 5% of its portfolio every year by law, to get yield, while trying to balance safety in so why can't you live off of 5% of your CR : Barron's quoted you as saying, portfolio income. savings every year? Maybe it doesn't have "Profit cycles are the most critical part." Can KB: Throughout my career, I was known to be a person who is very bull- 5%. May it should be 2% or 3%, you elaborate on that? RB: People spend way too much ish on yield and thought it was very can't live off of their capital gains. And time looking at GDP [gross domestic important. I was the one who came up I think that is as unwise as the thinking product]. Stock markets don't trade with the statistic that since NASDAQ's 10 or 12 years ago. People will have to on GDP. They trade on corporate inception in 1971, utility stocks have realize that there should always a mix- profits-the corporate sector. Let's go outperformed the NASDAQ composite. ture of both. back to 2009: People were so confused It shows you the power of compounding CR: Bonds bave traditionally been safer One reason is that the corporate sector Cividends. So the way I describe it is that bave traditionally been safer One reason is that the corporate sector if you can win an NBA championship assets, but now there is concern about wbat became the largest percent of GDP shooting three-pointers or you can win will bappen when interest rates rise. How ever and corporate profits were actuan NBA championship shooting layups, does someone handle the potential for falling ally quite strong. So if you're watching why not shoot the layups? That field goal prices when bonds bave previously been viewed GDP, you're thinking, wow, GDP is 2% percentage is an awful lot higher. That's as being safe? so why is the stock market progressing? yield and capital appreciation. What it RB : What is interesting is that The answer is because corporate profits also says is that, regardless of age, people people are scared that interest rates are are doing so well and corporate profits should always have some income in going to rise, but they refuse to hold are the largest percentage of the GDP their portfolio. You know when you're equities. So the question we have to ever. So people spend too much time 25 , people always say, "Young man or ask is why would interest rates rise? looking at GDP and not enough time young woman, you have to invest for Interest rates are going to rise as the looking at corporate profits. What you growth!" 'Think about if you're retiring economy gets stronger. If the economy will find is that the driver of things like now, you would have been 25 in roughly gets stronger, equities do pretty well. styles-growth/value, large/small, qual1971, and someone would have said you But nobody wants to make that leap. ity cycles and all the other things people need to invest in growth. But actually if Everyone thinks that interest rates are talk about-is the profit cycle. So when you had invested in income during that going up because the Federal Reserve is profit cycles rev up, you basically want time, you probably would have been doing something artificial, the dollar is to take on more risk, you want to go happier today with just compounding going to become the peso, we are becom- down in size, you want to become more the dividends. ing a third-world country, etc. You can cyclical, you want to go away from yield, Income is not something that is age- make all of this stuff up, but the reality etc. And when profit cycles roll over and dependent, which is what most people is that interest rates have been backing decelerate, you want to become more think. Everybody should have some up already. They have been backing up defensive and more large cap and things income in their portfolio, regardless of because the economy has been getting like that. It works pretty well over time. how old you are. The proper amount is stronger. People don't seem to believe a question of risk tolerance and not of in the business cycle anymore; we are CR : In terms of analyzing the profit age. What you find is that older people experiencing a growth business cycle cycle, what time period should investors use to become more income-dependent. The and as that has happened, the stock measure it? problem right now is that if we go back market has continued to do well. So I RB: What we do is take the year10 or 12 years, everyone wanted capital don't think people should be so put off. to-year change in trailing four-quarter appreciation and nobody wanted income One area that I would suggest that earnings. Any one quarter can be quite because of the tech bubble. Now every- people are not worried about but should volatile, so that doesn't really tell you a one wants income and they don't want be is non-U.S. bonds, because the dollar lot. So we try to smooth that out over capital appreciation. The needle went is strengthening and emerging market a longer period to look at the fundafrom one direction to 180 degrees to the economies have been getting weaker. mentals. other direction, and I think people are So it is funny that people are worried being as unwise as they were 10 or 12 about issues in the United States, and individual investor, would years ago because every investor should they are not even aware that a lot of using the Serp 500 index numbers work? RB: Yes, that's what we use: S\&P A lot of people say the market is very are uncertain, they say that it is terribly 500 reported earnings. The S\&P puts overvalued and there is great uncertainty. overvalued and when they are certain, them out all the time; you can get them Financial theory tells you that that is it is a bargain. That can't happen. anywhere. an impossible combination. You can- Richard Bernstein is the chief executive officer of Richard Bernstein Advisors LLC. Find out more at www.aaii.com/authors/ richard-bernstein. Charles Rotblut, CFA, is a vice president at AAll and editor of the AAll Journal. Find out more about Charles at www.aaii.com/authors/charles-rotblut and follow him on Twitter at twitter.com/charlesrotblut. 1) Long-term Treasury Bonds with a 10-year maturity are currently yielding about 0.70%, the lowest yields in many decades. Stocks on average have an annual return of around 10%. Why would anyone add long-term Treasury bonds to a stock portfolio? 2) Why does the Eaton Vance Richard Bernstein All Asset Strategy Fund (EARAX) have the lowest standard deviation among the funds? 3) If you were building your own portfolio, would you use gold as a diversifier? Explain your answer. 4) If you were given $1,000,000 to buy into any combination of the 5 funds in the spreadsheet, which allocation would you choose, based on your risk/return preferences? Calculate your weighted average portfolio return and portfolio beta based on the historical 5-year annualized returns. Article Highlights - It's not the number of assets that determines diversification; it's the correlation among them. - Diversifying means buying asset classes you don't like in order to insure against your assumptions being wrong. - The profit cycle is the driver of investment styles. When the profit cycle revs up, you want to take on more risk. quarter or do it every six months. Pick have an optimal combination of yield the U.S. issues aren't happening in the a date in your calendar and circle it and and capital appreciation. Some people United States; rather, they are happening that's the day you're going to rebalance. say, 'What do I live off of, if I don't have in emerging markets. That is probably You're not going to rebalance in between. this yield?' Well, wait a minute-let's where the risk is, but most people still think like a pension or an endowment don't appreciate the risks in emerging CR: What about yield? Yield, especially for a second. An endowment spins off markets. for our retired members, is a big issue-trying 5% of its portfolio every year by law, to get yield, while trying to balance safety in so why can't you live off of 5% of your CR : Barron's quoted you as saying, portfolio income. savings every year? Maybe it doesn't have "Profit cycles are the most critical part." Can KB: Throughout my career, I was known to be a person who is very bull- 5%. May it should be 2% or 3%, you elaborate on that? RB: People spend way too much ish on yield and thought it was very can't live off of their capital gains. And time looking at GDP [gross domestic important. I was the one who came up I think that is as unwise as the thinking product]. Stock markets don't trade with the statistic that since NASDAQ's 10 or 12 years ago. People will have to on GDP. They trade on corporate inception in 1971, utility stocks have realize that there should always a mix- profits-the corporate sector. Let's go outperformed the NASDAQ composite. ture of both. back to 2009: People were so confused It shows you the power of compounding CR: Bonds bave traditionally been safer One reason is that the corporate sector Cividends. So the way I describe it is that bave traditionally been safer One reason is that the corporate sector if you can win an NBA championship assets, but now there is concern about wbat became the largest percent of GDP shooting three-pointers or you can win will bappen when interest rates rise. How ever and corporate profits were actuan NBA championship shooting layups, does someone handle the potential for falling ally quite strong. So if you're watching why not shoot the layups? That field goal prices when bonds bave previously been viewed GDP, you're thinking, wow, GDP is 2% percentage is an awful lot higher. That's as being safe? so why is the stock market progressing? yield and capital appreciation. What it RB : What is interesting is that The answer is because corporate profits also says is that, regardless of age, people people are scared that interest rates are are doing so well and corporate profits should always have some income in going to rise, but they refuse to hold are the largest percentage of the GDP their portfolio. You know when you're equities. So the question we have to ever. So people spend too much time 25 , people always say, "Young man or ask is why would interest rates rise? looking at GDP and not enough time young woman, you have to invest for Interest rates are going to rise as the looking at corporate profits. What you growth!" 'Think about if you're retiring economy gets stronger. If the economy will find is that the driver of things like now, you would have been 25 in roughly gets stronger, equities do pretty well. styles-growth/value, large/small, qual1971, and someone would have said you But nobody wants to make that leap. ity cycles and all the other things people need to invest in growth. But actually if Everyone thinks that interest rates are talk about-is the profit cycle. So when you had invested in income during that going up because the Federal Reserve is profit cycles rev up, you basically want time, you probably would have been doing something artificial, the dollar is to take on more risk, you want to go happier today with just compounding going to become the peso, we are becom- down in size, you want to become more the dividends. ing a third-world country, etc. You can cyclical, you want to go away from yield, Income is not something that is age- make all of this stuff up, but the reality etc. And when profit cycles roll over and dependent, which is what most people is that interest rates have been backing decelerate, you want to become more think. Everybody should have some up already. They have been backing up defensive and more large cap and things income in their portfolio, regardless of because the economy has been getting like that. It works pretty well over time. how old you are. The proper amount is stronger. People don't seem to believe a question of risk tolerance and not of in the business cycle anymore; we are CR : In terms of analyzing the profit age. What you find is that older people experiencing a growth business cycle cycle, what time period should investors use to become more income-dependent. The and as that has happened, the stock measure it? problem right now is that if we go back market has continued to do well. So I RB: What we do is take the year10 or 12 years, everyone wanted capital don't think people should be so put off. to-year change in trailing four-quarter appreciation and nobody wanted income One area that I would suggest that earnings. Any one quarter can be quite because of the tech bubble. Now every- people are not worried about but should volatile, so that doesn't really tell you a one wants income and they don't want be is non-U.S. bonds, because the dollar lot. So we try to smooth that out over capital appreciation. The needle went is strengthening and emerging market a longer period to look at the fundafrom one direction to 180 degrees to the economies have been getting weaker. mentals. other direction, and I think people are So it is funny that people are worried being as unwise as they were 10 or 12 about issues in the United States, and individual investor, would years ago because every investor should they are not even aware that a lot of using the Serp 500 index numbers work? RB: Yes, that's what we use: S\&P A lot of people say the market is very are uncertain, they say that it is terribly 500 reported earnings. The S\&P puts overvalued and there is great uncertainty. overvalued and when they are certain, them out all the time; you can get them Financial theory tells you that that is it is a bargain. That can't happen. anywhere. an impossible combination. You can- Richard Bernstein is the chief executive officer of Richard Bernstein Advisors LLC. Find out more at www.aaii.com/authors/ richard-bernstein. Charles Rotblut, CFA, is a vice president at AAll and editor of the AAll Journal. Find out more about Charles at www.aaii.com/authors/charles-rotblut and follow him on Twitter at twitter.com/charlesrotblut

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