Introduction to Portfolio Theory
"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
Introduction to Portfolio Theory
"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
7-1: Introduction to Portfolio Theory
Introductory presentation of basic portfolio theory concepts.
Calculation of portfolio risk, return, correlation, and covariance, and minimum variance. Discussion of the portfolio frontier, efficiency through minimum variance, and diversification.
Adaptation of asset price frequency, comparison on different methods of calculating of asset rate-of-return, and discussion of risk based on mean-variance.
Discussion of portfolio optimization in the presence of a risk-free asset. Conceptual and mathematical derivation of the capital allocation line and capital market line.
Use of the linear regression models to analyze returns; conceptual understanding and calculation of asset alpha and beta; use of the Security Market Line to analyze abnormal returns.
Portfolio Management
"(Returns of) more than five standard deviations from the mean should be observed about once every 7,000 years. In fact such observations seem to occur about once every three or four years." - Eugene Fama
8-2: Portfolio Data & Indexes
A number of abrupt issues arise when applying Portfolio Theory to actual portfolios. These first two factsheets elaborate on some of the data sources and modifications that must be made to standardize data prior to being included in a portfolio.
8-4: Portfolio Allocation
The initial allocation of funds to a portfolio, the process of rebalancing the portfolio after asset classes grow at different rates, and the payment of disbursements to shareholders or partners, all represent fundamental challenges to portfolio managers.
This case applies the whole of chapter 7 & 8 to the TSP portfolio. The intent of this case is to improve upon the TSP Lifecycle Funds.