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Chapter 4: Why is asset allocation important? Traditional or Roth IRA? Why or why not? With...

Chapter 4: Why is asset allocation important? Traditional or Roth IRA? Why or why not?

With the indexes and passive management outperforming active management, argue for and against active management.

Chapter 5: Identify the sources of risk. Explain beta and why is it important. What makes a portfolio efficient?
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Answer #1

Asset allocation

  • Asset allocation diversifies the total investment into different Assets classes
  • As such it minimize or diversifies the overall risk.
  • Different Assets classes have different maturity profiles.
  • Asset like bonds and fixed income securities providie almost rosk free income.
  • The risk tolerance level of the investor can be adjusted as per the requirement.
  • Asset allocation helps in reaching the financial goal or achieving it faster.

With ROTH IRA the after tax contributions grows constantly with tax free and also liquidity is higher as there are provisions of liquidation after a certain age, while traditional IRA may contribute pre or post tax dollars and growth is tax deferred and withdrawals are taxed.

Active Assets allocation is preferred as the portfolio is managed more versatilley and the downside risk is managed and liquidity profiles are improved.

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