Nov 22 2008
Diversification Through Asset Classes
In this “movie” I divided the portfolio into eleven different asset classes. The reason for using only eleven is to match the same number of sectors used in the prior post. Note that the projected annual return increased, the standard deviation decreased, and the diversification metric increased. When the portfolio is diversified across asset classes rather than sectors, all three important metrics move in the preferred direction.
Another important lesson to take home is that one can improve on each of these portfolios by not investing equal amounts in each ETF. Using the Quantext Portfolio Planning software, one can make tactical moves so as to increase projected return while reducing risk. These tactical asset allocation decisions will be shown over the next few weeks in Premium Content.
Lowell Herr
Photograph: View of the Rhine River from atop the Marksburg Castle. As one can see, it was a dreary day.
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