o How much return variability is explained by market timing, how much by stock selection?

• What do Ibbotson & Kaplan say about Asset Allocation?

• How about Jahnke?

o -Jahnke was criticizing the assumptions made by BHB about how the average asset class weights for the period studied are the same as the actual normal policy weights.

o Investments in foreign stocks, real estate, private placements, and venture capital can be proxied by a mix of stocks, bonds, and cash

o They assume that the benchmarks for stocks, bonds, and cash against which fund performance was measured are appropriate

o Each of these assumptions can lead to a faulty measurement of success or lack of success at market timing and stock selection.

o Why does asset allocation policy explain only a small fraction of the ten-year returns, but a large fraction of the variation of short-term returns? The answer is simple: the effect of compounding returns. Persistent small increments to periodic returns compound over time, while the volatility in returns grows more slowly as the investment period is lengthened.

o While the BHB study observes that asset allocation policy explains 93.6 percent of the variance of quarterly portfolio returns, when using the more appropriate standard deviation, asset allocation policy explains only 79 percent of the variation of quarterly returns.

o Considering cost relating to returns; over an investor's investment life cycle, excessive costs can reduce wealth accumulation by 50 percent! In fact, for many individual investors, cost is the most important determinant of portfolio performance, not asset allocation policy, market timing, or security selection.

o Asset allocation should be viewed as a dynamic process, It should take into consideration both investment goals and capital market opportunities, including risk.

o As investor goals and investment opportunities change, asset allocations should also change (obviously taking into consideration the cost benefit relationship of making portfolio changes, such as transaction costs, market impact, and taxes)

o Asset Allocation is a scientific method for allocating assets. Second, the idea is to buy undervalued assets and to sell overvalued assets and to wait until the market corrects the perceived misvaluations; this approach differs fundamentally from flatly declaring that 'this is the bottom' or 'this is the top