Building investment portfolios using Modern Portfolio Theory
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Investors with global portfolios of equities and bonds are generally aware that their asset allocation decisions, the proportions of funds they invest in the different asset classes, their regional exposures as well as the degree of currency exposure, are amoBuilding investment portfolios using Modern Portfolio Theory
Investors with global portfolios of equities and bonds are generally aware that their asset allocation decisions, the proportions of funds they invest in the different asset classes, their regional exposures as well as the degree of currency exposure, are amongst the most important decisions they make (from an investments point of view). When deciding on the appropriate allocation, they are usually comfortable making the simplified assumption that their investment objective is to maximise expected return for a given level of risk. Asset allocation is the process of dividing investments among different kinds of asset classes, namely, equities, bonds, cash or even real estate in such a manner so as to achieve an adequate combination of risk and reward (known as the risk-reward trade-off) that is commensurate with an investor's specific situation and goals. It is a known fact that the crux of the optimal asset allocation decision lies on what investors call diversification and investment managers refer to as correlation. Managers of balanced funds tend to adopt the od structuring a portfolio of unrelated securities that tend to move in opposite directions (having negative... Read more














