Tag: Modern Portfolio Theory
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What Is an Asset Class? A Closer Look at a Common but Vague Term
How would you answer the question, “What is an asset class?” This sounds like a simple question, but it turns out that even large institutions struggle to provide a well-defined answer. In this post, we’ll discuss why it matters and how to define an “asset class.” The Tangency Portfolio and…
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From Tangency to Barbell Strategy: What Smart Investors Actually Do
What if one of the most elegant ideas in investment theory turns out to be nearly impossible to apply in the real world? In previous posts, we developed a number of ideas from Modern Portfolio Theory leading to the idea of the Tangency Portfolio. As a reminder, the Tangency Portfolio…
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The Capital Market Line—Is it the Holy Grail?
In a previous post, we introduced the concept of the efficient frontier. The efficient frontier concept is frequently presented in a graph, such as the following. Capital Market Line Now comes the insight of a single “efficient risky portfolio.” The assumption is that an investor can choose to allocate his…
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Do You Know How You’re Influenced by Modern Portfolio Theory?
Almost everyone believes that you should diversify your assets – but there are different explanations about why. It is sometimes said (though how anyone would know is another story) that fish are not aware that they swim in water. Similarly, many investors today live in a world shaped by many…