The oldest trick in the investment book


The oldest rule in the financial book is that risk and return are related. If you want a higher expected return, you have to take on more risk. If you want to lower risk, you can only do so at the cost of expected return.

Though I always like to specify that the volatility or variability of a portfolio is not necessarily risk to a lifetime investor, in order to objectively evaluate the risk level of investment portfolios for research purposes, variability of portfolio returns is what is used. If you want a higher expected return, you have to accept more variability in your portfolio. If you want less variability, it will cost you as far as expected return.

More from Investor Toolkit:
Advisors turn to life coaches and counselors
Retirees leave $100B in Social Security benefits on table
How much those advisor fees are costing you

Enter Markowitz, who showed in his research that by building a portfolio of investments that are not perfectly positively correlated (a fancy way of saying they behave differently from one another), an investor could actually lower portfolio variability without sacrificing expected return. No wonder diversification is known as the only free lunch in finance; you actually receive the benefit of lower portfolio variability without giving anything up.

Source link

Products You May Like

Articles You May Like

Best Buy to benefit from Sears bankruptcy, analyst says
Investors can get tax breaks for investing in opportunity zones: Treasury
Homeowners to start tapping $14.4 trillion in equity, research says
Parents are in the dark about how much college will cost 
Student loan debt isn’t just a millennial problem 

Leave a Reply

Your email address will not be published. Required fields are marked *