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Portfolio Optimization

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Portfolio Optimization I Discuss aspects of PO, including the Efficient Frontier, Capital Allocation Line, Modern Portfolio Theory and Portfolio Correlation. – PowerPoint PPT presentation

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Title: Portfolio Optimization


1
Portfolio Optimization
  • I Discuss aspects of PO, including the Efficient
    Frontier, Capital Allocation Line, Modern
    Portfolio Theory and Portfolio Correlation.
  • II Discuss how LTCMs Portfolio Optimization went
    wrong, including the portfolios 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

2
(No Transcript)
3
http//www.creativewealthstrategies.com/Modern_Por
tfolio_Theory.doc
4
(No Transcript)
5
The Efficient Frontier for SP 100
http//www.nag.co.uk/doc/TechRep/Pdf/tr2_00.pdf
6
http//www.moneychimp.com/articles/valuation/capm.
htm
7
http//en.wikipedia.org/wiki/FileMarkowitz_fronti
er.jpg
Efficient Frontier.
8
Portfolio Optimization with two assets
Corporate Bond Treasury Risk-free
Optimal Portfolio
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
9
Portfolio Optimization
Capital Allocation Line
The Efficient Frontier
Corporate Bond
Treasury Bond
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
10
www.indexfundeducator.com
11
www.indexfundeducator.com
12
www.indexfundeducator.com
13
Risk and the Number of Securities Risk ( pa)
Number of Securities
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
14
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
15
default-rate volatility
Moodys Investor Services, Alexandra Berthault
16
http//www.travismorien.com/FAQ/portfolios/mptcrit
icism.htm
17
(No Transcript)
18
(No Transcript)
19
Passive Investing Produces Better Returns Over
Time
20
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/mptcrit
icism.htm
21
To summarize
  • Optimum portfolio is where
  • Efficient frontier meets the CAL

http//www.moneychimp.com/articles/valuation/capm.
htm
22
Lessons learned from LTCM
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
23
MPT Not Realistic
http//www.travismorien.com/FAQ/portfolios/mptcrit
icism.htm
24
Passive Investing Produces Better Returns Over
Time
25
Thank you
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