Title: Portfolio Optimization
1Portfolio 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
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3http//www.creativewealthstrategies.com/Modern_Por
tfolio_Theory.doc
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5The Efficient Frontier for SP 100
http//www.nag.co.uk/doc/TechRep/Pdf/tr2_00.pdf
6http//www.moneychimp.com/articles/valuation/capm.
htm
7http//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
9Portfolio 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
10www.indexfundeducator.com
11www.indexfundeducator.com
12www.indexfundeducator.com
13Risk 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
14Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
15default-rate volatility
Moodys Investor Services, Alexandra Berthault
16http//www.travismorien.com/FAQ/portfolios/mptcrit
icism.htm
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19Passive Investing Produces Better Returns Over
Time
20The 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
21To summarize
- Optimum portfolio is where
- Efficient frontier meets the CAL
http//www.moneychimp.com/articles/valuation/capm.
htm
22Lessons learned from LTCM
Value at Risk, 3rd Ed. The New Benchmark for
Managing Financial Risk, Philippe Jorion, pps
557-563
23MPT Not Realistic
http//www.travismorien.com/FAQ/portfolios/mptcrit
icism.htm
24Passive Investing Produces Better Returns Over
Time
25Thank you