Sample Reports for The Expert Allocator by Investment Technologies Telephone 212/724-7535 Fax 212/208-4384 Support Telephone 203/364-9915 Fax 203/547-6164 e-mail support@investmenttechnologies.com Website www.investmenttechnologies.com
Introduction Power. Flexibility. Ease-of-use. That s what you get with The Expert Allocator. Power with dual-frontier optimization, your choice of risk measures, and state-of-the-art modeling of skewed return distributions. Flexibility with the Analysis Window s flexible layout and point-and-click design, customizable charts, surplus optimization, after-tax capabilities, wealth projections, and built-in forecasting tools to help you develop asset assumptions. Ease-of-use with The Expert Allocator s intuitive Desktop that guides you through the three steps in an asset allocation worksession. Just to name a few. This booklet contains a sampling of the many charts and tables available in The Expert Allocator. Use The Allocator s ready-made charts or create your own. Charts can be customized in the Allocator or exported to other Windows applications such as Word, Freelance, PowerPoint, and Harvard Graphics. Worksheet tables can be printed or exported to Excel or a text file. The Expert Allocator Sample Reports 1
Asset Assumptions The Expert Allocator Sample Reports 2
Expected Return (%) % Risk and Return Assumptions Pre-Tax Risk and Return Assumptions 15 13.1 13.3 12.8 11.6 10 9.5 10.2 8.9 6.1 5 4.0 3.0 0 Bonds Cash Equivalents Foreign Stocks Large Stocks Small Stocks Expected Return Downside Deviation at 9% Goal 14 Pre-Tax Risk/Return Scatter Small Stocks Foreign Stocks Large Stocks 12 10 Bonds 8 Cash Equivalents 6 3 5 7 9 11 13 Downside Deviation at 9% Goal Use The Expert Allocator s forecasting tools to develop risk, return, and correlations assumptions from historical returns or economic scenario forecasting. Or enter your own assumptions directly into the Risk and Return worksheet and Correlation worksheet. Then present your assumptions in chart or table form. Show returns as pre-tax or after-tax, and risk as standard deviation or downside deviation. To evaluate the effect of risk measure on portfolio selection, optimize two efficient frontiers--one using downside deviation and the other using standard deviation. The Expert Allocator Sample Reports 3
Risk and Return Assumptions Asset Class Expected Downside Dev@ 90%ile 10%ile Vol Ret Distribution Asset Return 9.00% Std Dev Return Return Skew Shape Proxy Bonds 9.47 3.99 5.86 1.86 16.85 0.95 True Fixed Income Cash Equivalents 6.07 3.04 0.81 5.14 7.14 1.26 True All Income Foreign Stocks 13.08 10.21 17.19-9.16 34.87 0.97 True Large-Cap Equity Large Stocks 12.82 8.85 14.82-6.50 31.37 0.94 True Large-Cap Equity Small Stocks 13.28 11.63 20.93-12.53 40.74 1.10 True Small-Cap Equity You can show each asset s risk and return statistics based on (1) its true underlying distribution (which may be skewed) and normal distribution and (2) pre-tax or after-tax basis. All forecasts can be edited directly in the Risk and Return worksheet. Add a liability or benchmark to do surplus optimization. To evaluate the effect of return distribution shape on portfolio selection, optimize two efficient frontiers--one using true distributions and the other using normal distributions. The Expert Allocator Sample Reports 4
Correlation Assumptions Show correlations graphically for all assets (below left) or for one asset at a time (below right). The Expert Allocator Sample Reports 5
Correlation Assumptions Bonds Cash Equivalents Foreign Stocks Large Stocks Small Stocks Bonds 100 Cash Equivalents -5 100 Foreign Stocks 23-15 100 Large Stocks 38-9 47 100 Small Stocks 27-8 41 81 100 Correlations can be edited directly in the Correlation worksheet. All values are automatically checked for consistency. To evaluate the benefits of diversification in portfolio selection, optimize two efficient frontiers--one using your correlation assumptions and the other using perfect positive correlation for all assets. The Expert Allocator Sample Reports 6
Investor Information The Expert Allocator Sample Reports 7
Asset Mix Constraints Asset Class Min Max Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Bonds 0 100 Cash Equivalents 0 100 Foreign Stocks 0 25 x Large Stocks 0 80 x Small Stocks 0 80 x Group Min 0 0 0 0 0 0 0 Group Max 80 100 100 100 100 100 100 Because investors usually have requirements and limitations on exposure to certain assets, The Expert Allocator provides the flexibility to impose minimum and maximum asset mix constraints for individual assets and groups of assets. Constraints can be edited directly in the Constraints worksheet. All values are checked for consistency. To evaluate the effect of constraints on portfolio selection, optimize two efficient frontiers--one with constraints and one without. The Expert Allocator Sample Reports 8
1 2 3 4 5 6 7 8 9 10 Dollar Amount 1 2 3 4 5 6 7 8 9 10 Dollar Amount Wealth and Cash Flows 15000 Cash Flows 10000 5000 0-5000 -10000 Cash Flows Today's Dollars Contributions Today's Dollars Withdrawals Today's Dollars Net 15000 Cash Flow 10000 5000 0-5000 -10000 Today's Dollars Contributions Today's Dollars Withdrawals Today's Dollars Net Cash Flow With The Expert Allocator, you can analyze optimization results in projected wealth values. In your analysis, you can specify the investor s beginning wealth and incorporate annual contributions to and withdrawals from the portfolio for up to 20 years. For each year, select a best month for more accurate weighting of annual cash flows. The Expert Allocator Sample Reports 9
Wealth and Cash Flows Beginning Wealth: $1,000,000.00 Years to Project: 5 Enter Cash Flows in: Today's Dollars Project Wealth with Cash Flows in: Future Dollars Annual Inflation Rate: 5.00% Today's Dollars Future Dollars Year Contributions Withdrawals Net Cash Flow Contributions Withdrawals Net Cash Flow Timing 1 $10,000.00 $2,500.00 $7,500.00 $10,500.00 $2,625.00 $7,875.00 Jul 2 2,500.00 5,000.00-2,500.00 2,756.25 5,512.50-2,756.25 Jul 3 5,000.00 3,500.00 1,500.00 5,788.13 4,051.69 1,736.44 Jul 4 1,000.00 2,000.00-1,000.00 1,215.51 2,431.01-1,215.51 Jul 5 10,000.00 1,000.00 9,000.00 12,762.82 1,276.28 11,486.53 Jul 6 10,000.00 1,000.00 9,000.00 13,400.96 1,340.10 12,060.86 Jul 7 0.00 5,000.00-5,000.00 0.00 7,035.50-7,035.50 Jul 8 0.00 5,000.00-5,000.00 0.00 7,387.28-7,387.28 Jul 9 0.00 5,000.00-5,000.00 0.00 7,756.64-7,756.64 Jul 10 0.00 5,000.00-5,000.00 0.00 8,144.47-8,144.47 Jul The Expert Allocator Sample Reports 10
Tax Details The Expert Allocator offers the capability to calculate and optimize with after-tax returns. Specify Federal, State, and Local tax rates for capital gains and ordinary income in the Tax Rates worksheet. For each Asset Proxy, specify the proportion of total (pre-tax) return from taxable capital gains, from taxable dividend and interest, and free of taxes in the Asset Proxy worksheet. Each asset in your analysis is assigned an Asset Proxy in order to calculate after-tax returns. Tax Rates: Marginal Short-Term Marginal Long-Term Capital-Gains Rates Capital-Gains and Ordinary-Income Rates Federal 28.0 39.0 State 6.0 6.0 Local 2.0 2.0 Total 36.0 47.0 Asset Proxies: Asset Proxy Portion of Pre- Tax Return from Taxable Capital Gains Portion of Pre-Tax Return from Taxable Dividends and Interest Portion of Total Return Free of Taxes Total Annual Turnover Tax Free 0.0 0.0 100.0 100.0 0.0 All Capital Gains 100.0 0.0 0.0 100.0 0.0 All Income 0.0 100.0 0.0 100.0 0.0 Large-Cap Equity 80.0 20.0 0.0 100.0 0.0 Small-Cap Equity 90.0 10.0 0.0 100.0 0.0 Fixed Income 30.0 70.0 0.0 100.0 0.0 To evaluate the effect of taxes on portfolio selection, optimize two efficient frontiers--one using pre-tax returns and the other using after-tax returns. The Expert Allocator Sample Reports 11
Evaluating Optimization Results The Expert Allocator Sample Reports 12
Expected Return (%) Expected Return (%) Risk/Return Analysis 15.0 Risk/Return Analysis 13.0 11.0 Current Mix 9.0 Goal 7.0 15.0 5.0 0 5 10 15 Risk/Return Analysis DR Frontier S&P 500 Composite MSCI EAFE Index US$ Annual Standard Deviation (%) MV Frontier DR Frontier 13.0 11.0 Lehman Corp Bond Russell 2000 9.0 Goal 7.0 90-Day Treasury Bills 5.0 0 5 10 15 20 25 Annual Standard Deviation (%) Only The Expert Allocator lets you display and analyze two frontiers simultaneously or just one at a time. With two frontiers, you can easily and immediately evaluate the impact from: imposing constraints on asset holdings gaining benefits from diversification having different investment horizons having different investment goals using two different risk measures taxes skewness in forecasted asset returns With the click of your mouse, you can plot returns or wealth values on the vertical axis and choose among ten different risk measures to plot on the horizontal axis. The Expert Allocator Sample Reports 13
Allocation (%) Allocation (%) Asset Mix Analysis Asset Mix for Efficient Frontier: 5-Year HP 100 Small Stocks 80 60 Large Stocks 40 Foreign Stocks 20 Cash Equivalents 0 1 5 9 13 17 21 25 29 33 37 Bonds Asset Mix for Efficient Frontier: 5-Year HP 3 7 11 15 19 23 27 31 35 39 80 Efficient Portfolios Bonds 60 Cash Equivalents 40 Foreign Stocks 20 Large Stocks 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Small Stocks Efficient Portfolios You can see asset allocation for the entire efficient frontier in a single chart. At a glance you can see which assets are included (and which are not) and whether any constraints have been hit. The Expert Allocator Sample Reports 14
Asset Mix Analysis Current Mix 90-Day Treasury Bills 5% Lehman Corp Bond 35% MSCI EAFE Index US$ 10% Russell 2000 15% S&P 500 Composite 35% Portfolio Allocations 90-Day Treasury Bills $0.0 $8.9 Lehman Corp Bond $62.3 $127.8 DR Frontier/ Port 4 MSCI EAFE Index US$ $20.4 $17.8 Russell 2000 $8.5 $26.7 S&P 500 Composite $13.6 $62.3 Current Mix $0.0 $50.0 $100.0 $150.0 Wealth Allocation ($) Show asset mix for a single portfolio in a pie chart or compare allocations of two portfolios in a bar chart using percentages or wealth values. The Expert Allocator Sample Reports 15
Portfolio Statistics 3.0 Portfolio Statistics for 5-Year HP 2.5 2.0 Sharpe Ratio @ 3% RFR (HP=5) 1.5 1.0 0.5 0.0 50 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 Sortino Ratio (HP=5 Goal=9%) Portfolio Statistics for 5-Year HP Efficient Portfolios 40 30 Downside Probability (HP=5 Goal=9%) (%) 20 10 Downside Probability (HP=1 Goal=9%) (%) 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 12 16 32 34 2 4 6 8 10 14 18 20 22 24 26 28 30 36 38 40 Efficient Portfolios The Expert Allocator s most versatile chart, the Portfolio Statistics chart, is defined by you. Display just the information you want to show. Select from over 30 different portfolio statistics, three different holding periods, and four different goals. Display portfolio statistics for a single frontier, for two frontiers on the same chart, for assets, or for portfolios you specify. The Expert Allocator Sample Reports 16
Portfolio Statistics Portfolio Statistics 25.0 20.0 21.8 17.5 18.7 15.0 14.2 15.1 12.4 10.0 10.7 9.6 5.0 5.2 5.2 0.0 DR Frontier/Port 40 Current Mix Portfolios 95 Percentile Return (%) 75 Percentile Return (%) 50 Percentile Return (%) 25 Percentile Return (%) 5 Percentile 25.0 Return (%) 20.0 15.0 12.9 Portfolio Statistics 21.6 Downside Probability (%) 10.0 6.4 5.0 0.0 DR Frontier/Port 21 Portfolios 6.2 Current Mix Expected Downside Return (%) Compare your choice of portfolio statistics for any two portfolios. The Expert Allocator Sample Reports 17
Return (%) Return (%) Confidence Analysis 40.0 Range of Returns 30.0 20.0 10.0 0.0-10.0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 5-Yr 95%ile Efficient Portfolios 5-yr 5%ile 1-yr 95%ile 1-yr 5%ile 40 30 Range of Returns 20 10 0-10 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 5-yr 95%ile Efficient Portfolios 5-yr 5%ile 1-yr 95%ile 1-Yr 5%ile Illustrate uncertainty with The Expert Allocator s Confidence charts. Show how the range of possible returns varies across the frontier and over time. The Expert Allocator Sample Reports 18
The Shape of Uncertainty Returns Distribution Goal DR Frontier/ Port 37 Current Mix 0.0 5.0 10.0 15.0 20.0 25.0 Return (%) Wealth Distribution Goal DR Frontier/ Port 37 Current Mix $0 $55 $110 $165 $220 $275 $330 Wealth ($) Now you can accurately assess the true risk for an asset, portfolio, or manager. The Expert Allocator is the only optimizer that handles both symmetrical and skewed returns. At a glance, you can see the dispersion of possible returns for each portfolio, whether they are normally distributed or skewed, and how they compare with other portfolios. The Expert Allocator Sample Reports 19