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Portfolio Optimization. I Discuss aspects of PO, including the Efficient Frontier, Capital Allocation Line, Modern Portfolio Theory and Portfolio Correlation. IIDiscuss how LTCM’s Portfolio Optimization went wrong, including the portfolio’s correlation factor.

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Portfolio Optimization

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Portfolio Optimization

IDiscuss aspects of PO, including the Efficient Frontier, Capital Allocation Line, Modern Portfolio Theory and Portfolio Correlation.

IIDiscuss how LTCM’s Portfolio Optimization went wrong, including the portfolio’s correlation factor.

IIIDiscuss Portfolio Optimization and some problems associated with it.

IVContrast a simpler alternative to more elaborate strategies while producing more consistent performance


I a


http://www.creativewealthstrategies.com/Modern_Portfolio_Theory.doc

I b


I c


The Efficient Frontier for S&P 100

http://www.nag.co.uk/doc/TechRep/Pdf/tr2_00.pdf

I d


http://www.moneychimp.com/articles/valuation/capm.htm

I e


http://en.wikipedia.org/wiki/File:Markowitz_frontier.jpg

Efficient Frontier.

I f


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

II a


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

II b


www.indexfundeducator.com

II c


www.indexfundeducator.com

II d


www.indexfundeducator.com

II e


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

II f


Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563

II g


default-rate volatility

Moody’s Investor Services, Alexandra Berthault

II h


III a

http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm


IV a


IV b


Passive Investing Produces Better Returns Over Time

IV c


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/mptcriticism.htm

IV d


To summarize:

Optimum portfolio is where

Efficient frontier meets the CAL

http://www.moneychimp.com/articles/valuation/capm.htm


Lessons learned from LTCM

Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk, Philippe Jorion, pps 557-563


MPT Not Realistic

http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm


Passive Investing Produces Better Returns Over Time


Thank you


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