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EFFICIENT FRONTIERS AND
OPTIMALLY RISKY PORTFOLIOS
An investor can build a portfolio in countless ways by
combining different assets in varying proportions. Most
of the combinations, however, are not efficient—their
expected return is too little for the risk they assume,
or they have too much risk for the return they promise.
Some combinations are efficient. Their expected return
is more than the return for any other combination with a
comparable level of risk, or they have less risk than
any other combination with a comparable expected level
of return. These efficient combinations are the most
effective ways for investors to diversify their
portfolios. Efficient Frontiers and Optimally Risky
Portfolios explores the composition of efficient
portfolios and how they change with time and varying
expectations regarding asset class returns and risks.
Readers should note that efficient frontier results may
be highly time dependent and that dated optimally risky
portfolios are almost certainly not optimal today.
ARTICLES
A Sample Defensive Portfolio,
March 2009
A tax-exempt or tax-deferred investor concerned about
capital preservation and convinced that the U.S. and
other developed economies are in for an extended
recession continuing into 2010 would be well advised to
limit portfolio exposure to equities and real estate. In
"A Sample Defensive Portfolio", the Advisor presents a
sample portfolio with a total allocation of less than
28% to risky assets—including domestic and international
stocks, real estate and commodities.
View
article
Efficient Frontiers and
Optimally Risky Portfolios, August 2007
Portfolio compositions along the traditional efficient
frontier are highly dependent on the return and risk
expectations used to formulate the frontier. With this
issue, the Advisor inaugurates the use of improved
optimization methodology to report the resampled
efficient frontier. For a portfolio with an expected
standard deviation of 10%, the composition of the
resampled efficient portfolio includes every asset class
with the largest allocations to U.S. large-cap stocks
(14%), U.S. small-cap stocks (11%), UK stocks (7%),
Japan stocks (6%), real estate (7%), commodities (24%),
and MBSs (13%). Other allocations of three percent or
more include euro area stocks (3%), emerging market
stocks (4%), high-yield bonds (3%), and foreign
investment-grade bonds (3%).
View
Article
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West Hartford