ASSET ALLOCATION – INSTRUMENT FOR RISK MANAGEMENT IN THE CAPITAL MARKET

This paper aims to point to one ofthe main reasons for poor performance ofindividual and institutional investors in theinvestment process. The first step that is proposedwhen investing is defining investment policy(Investment Policy Statement – IPS). Mostindividual and institutional investors in BH have noclearly defined investment policy. By respectingsimple rules that the investment process involvesthe beginner’s mistakes could have been avoided toa great extent and financial losses in investorsportfolios could have been reduced as well.Practicing concept of assets allocation, mutualfunds would preserve the value of assets undermanagement in the amount of BAM 213 million forits 417,000 shareholders. Assets allocation involvesmaking decisions about the choice betweendifferent classes of assets in the portfolio. Thisconcept explains between 80% and 90% of portfolioperformance measured by return on investment.Passivity of investment funds has led to illiquidity ofthe market, preventing the restructuring of theissuers at the Banja Luka Stock Exchange, theabsence of support for the process of incorporationand slowing down the process of creating newfinancial instruments in domestic market. Withadequate assets allocation investors manage andcontrol the portfolio risk, increase yield, introducediscipline in the investment process and become"intelligent investors."