1. Investment PresentationBy
Professor David M. Sinow
University of Illinois

2. What makes a difference when you invest?
Investing Overview
What makes a difference when you invest?
Equities vs. Fixed Income
Volatility Is Your Enemy
Longer Term Fixed Income Investments Are Too Risky
Three Factor Model
Asset Allocation: The Real Key to Investing
Dave’s Couch Potato Portfolio

3. Asset Class Performance 1925-1996

4. Volatility is Your Enemy!!!!
Assume I invest $ for one year & earn 0% at the end of year 1. Assume that the following year I invest the $ and earn 0% again. My average return is 0%.
Now Assume that you invest $ for one year and earn 50% at the end of year 1. Assume the following year you invest $ and your second year rate of return is a –50%.
We each had an average rate of return of 0% over the two year period.

5. But……….Who has more money at the end of the 2 years????
A) Me
B) You
MORAL OF THE STORY: VOLATILITY KILLS PORTFOLIOS
IN DOWN YEARS—BECAUSE YOU LOSE A GREATER PERCENTAGE OF YOUR GAINS FROM PREVIOUS YEARS!!!!

6. Risk/Reward: Does it Pay to Extend Maturities? 1964-1994
(%)
Long maturity instruments are riskier.
Returns for longer maturity instruments are not consistently greater.
Alternative strategies are needed to enhance returns.
Annualized Return (%)
6.56
7.43
7.53
7.70
6.89
Annualized Standard Deviation
1.32
1.64
2.16
6.68
11.50

7. “Out-of-Favor Companies
Three Elements That Determine the Majority of an Equity Fund’s Expected Return
5.86%
Average
Annual
Returns
5.13%
3.58%
Market Factor
All-Equity Universe
Minus T-bills
Size Factor
Small Stocks Minus Large Stocks
Style Factor
“Out-of-Favor Companies
Minus
“Glamour” Companies

8. Porfolio #1 – A Basic Portfolio Passively Invested
Expected Return
Standard Deviation
Portfolio #1
13.6%
10.3
60% S&P 500 Index
40% Lehman Gov/Corp. Index

9. Porfolio #2 – A Basic Portfolio Substituting Short-Term Fixed Income for Long-Term Fixed Income
Expected Return
Standard Deviation
Portfolio #1
13.6%
10.3
Portfolio #2
13.3%
8.6
60% S&P 500 Index
40% 1-yr Fixed Income

10. Porfolio #3 – A Basic Portfolio Balancing Equities, S & P, and US Small Cap Index
Expected Return
Standard Deviation
Portfolio #1
13.6%
10.3
Portfolio #2
13.3%
8.6
Portfolio #3
14.9%
9.9
30% S&P 500 Index
40% 1-yr Fixed Income
30% Small Cap

11. Porfolio #4 – A Basic Portfolio Balancing US Small Cap Value, US Small Cap, US Large Value, and S&P 500 Index
Expected Return
Standard Deviation
Portfolio #1
13.6%
10.3
Portfolio #2
13.3%
8.6
Portfolio #3
14.9%
9.9
Portfolio #4
15.7%
9.8
15% S&P 500 Index
15% US Large Cap Value
40% 1-yr Fixed Income
15% Small Cap Value
15% Small Cap

12. Porfolio #5 – A Basic Portfolio Adding International Diversification
Expected Return
Standard Deviation
Portfolio #1
13.6%
10.3
Portfolio #2
13.3%
8.6
Portfolio #3
14.9%
9.9
Portfolio #4
15.7%
9.8
Portfolio #5
16.6%
9.1
7.5% S&P 500 Index
7.5% US Large Cap Value
7.5% Small Cap Value
40% 1-yr Fixed Income
7.5% Small Cap
15% Int’l Large Value
15% Int’l Small Value

13. DAVE’S COUCH POTATO PORTFOLIO
Asset Class
Percentage Invested
1 S&P 500
10%
2 US Large Value
16.5%
3 US Small Cap
4 US Small Cap Value
5 US Mid-Caps
6 US REIT 7%
7 Total International
25%
8 Emerging Markets 5%
Total
100%