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Portfolio Optimization
I Discuss aspects of PO, including the Efficient Frontier, Capital Allocation Line, Modern Portfolio Theory and Portfolio Correlation.
II Discuss how LTCM’s Portfolio Optimization went wrong, including the portfolio’s correlation factor.
III Discuss Portfolio Optimization and some problems associated with it.
IV Contrast a simpler alternative to more elaborate strategies while producing more consistent performance
I a
I b
http://www.creativewealthstrategies.com/Modern_Portfolio_Theory.doc
I c
The Efficient Frontier for S&P 100
I dhttp://www.nag.co.uk/doc/TechRep/Pdf/tr2_00.pdf
I e
http://www.moneychimp.com/articles/valuation/capm.htm
Efficient Frontier.
I f
http://en.wikipedia.org/wiki/File:Markowitz_frontier.jpg
Portfolio Optimization with two assets
Corporate Bond Treasury Risk-free
Optimal Portfolio
II a
Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563
Portfolio Optimization
Capital Allocation Line
The Efficient Frontier
II b
Corporate Bond
Treasury Bond
Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563
II c
www.indexfundeducator.com
II d
www.indexfundeducator.com
II e
www.indexfundeducator.com
Risk and the Number of Securities
Risk (% pa)
Number of Securities
II f
Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563
II g
Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563
default-rate volatility
Moody’s Investor Services, Alexandra Berthault
II h
III a http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm
IV a
IV b
IV c
Passive Investing Produces Better Returns Over Time
IV d
The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective. - Warren Buffett
http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm
To summarize:
Optimum portfolio is where
Efficient frontier meets the CAL
http://www.moneychimp.com/articles/valuation/capm.htm
Lessons learned from LTCM
Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563
MPT Not Realistic
http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm
Passive Investing Produces Better Returns Over Time
Thank you
