Historically, adding a small-cap value index fund to a diversified equity portfolio has lowered portfolio risk and increased returns.
The concept is to take small positions in a large number of speculative stocks to reduce overall portfolio risk.
The purpose is to reduce the risk of a large portfolio loss by balancing portfolio risk among different investment types.
Adding commodities also significantly decreased portfolio risk, according to the study.
Each has complementary investment styles and thus has resulted in a very nice, overall combined portfolio risk and return profile, with a very, very smooth chart.
The vertical axis (Y axis) is the compounded portfolio return and the horizontal axis (X axis) is portfolio risk as measured by the annual standard deviation of return.
Portfolio risk can be reduced with proper asset class selection.
The chaos in the markets on Thursday is bad news for investors prone to fretting about volatility, but it should be a boon to firms that evaluate portfolio risk.
However, to the extent a client reduces portfolio risk by blending in different asset classes, they must be prepared to accept even lower returns commensurate with the reduced portfolio risk.
Managers with the ability to adapt to change, with the ability to manage portfolio risk factors such as yield, duration, allocation weighting, and credit quality, can find success in multiple environments.
By defining human capital as an asset that must be grown and protected, investors can begin to ascertain how human capital issues impact overall portfolio risk and the probability of achieving their long-term financial goals.
Table 3 below provides a summary of the annualized standard deviation and returns for each asset class, the weighted average risk and return and the total portfolio risk and return from January 1979 through December 2009.
Huang is now turning his focus beyond gamers to a host of new customers that will need number-crunching power: oil companies doing deep-sea seismic analysis, Wall Street banks modeling portfolio risk and biologists visualizing molecular structures to find drug target sites.
Previous research had shown, for instance, that 29% of the variation in whether or not people invest in stocks depends on their DNA. Studies of professional traders had demonstrated that approximately 25% of individual variation in portfolio risk is due to genetics.
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With lower portfolio risk, local investors would also theoretically be able to pay more for Chinese companies, says William Goetzmann, a professor at Yale University who has published a rare paper on the pre-war ties between China's financial markets and the rest of the world.
"The trading strategy, which was subject to the bank's risk limits and used by many in the marketplace, was based on a legitimate market view that diversified and lowered the bank's portfolio risk during the peak of the financial crisis, " Deutsche Bank's Mr. Golden said in the statement.
In 2009, researchers assigned to analyze the Norwegian Government Pension Fund recommended it reorient its portfolio around risk factors.
Finally, the Start-Up Kit finishes by emphasizing the importance of keeping costs low and discusses ways to maintain your portfolio and risk level via rebalancing.
What's most important in the Trading Floor portfolio is risk management.
In other words, his approach to investing was to construct stories so that the chart fit his expectations, and in the process, our investing friend may have put his portfolio at risk.
When you provide this much discretion to a single manager, when you talk about that wide range, that wide band on duration, the ability to go long and short across the different macro factors, you can introduce some risk into the portfolio, not withstanding your risk target of a bond like volatility.
Levin noted that the London Whale portfolio breached critical risk limits in an ever-increasing fashion.
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They can actually play a useful role in enhancing liquidity and immunising a portfolio against unexpected risk.
Portfolio theory defines risk only as volatility, or the extent to which returns can vary from average.
Portfolio management involves risk management, but it might also take a little house cleaning to stay on track.
This is not to say that this or any portfolio will avoid risk.
With this strategy, he argues, investors can reduce the volatility of the portfolio and the risk of picking the loser rather than the winner.
By gaining exposure to the health care sector, investors can further diversify their portfolio (reducing risk) while also maximizing overall dividend performance (increasing returns).
But, there are other types of bonds and income-oriented investments that can be utilized to diversify a portfolio and mitigate risk that will continue to perform well in this environment.
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Even with alternative investments and other portfolio hedging techniques, bonds are a traditional asset class that can play a useful role in diversifying a portfolio and mitigating risk in any market environment.
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