The standard portfolio rule says that your stock percentage should rise with the expected return (stocks and bonds) divided by squared return volatility.
The recent return of volatility to the market combined with conflicting signals about the U.S. and the global economy are having an impact on individual investor sentiment.
While most everyone in the game is almost uniformly bullish on stocks for 2011, Tuesday saw a return of volatility as a couple of decent-sized sell programs appear to have hit the tape just after the Treasury had completed its 3-year bond auction.
FORBES: Markets Follow Traditional January Script ... So Far
Many sophisticated investors and hedge funds who use this standard formula are getting out, waiting for at least a return of lower volatility before getting back in.
In finance parlance and first described by Markowitz, this is an improved efficient frontier for portfolios: higher expected return for a given level of volatility, or lower volatility for a given level of expected return.
Modern portfolio theory advocates blending asset classes to maximize expected return and minimize portfolio volatility.
The efficient frontier is composed of investments with the highest return and the lowest volatility.
The efficiency of an investment is measured by the greatest return for the lowest volatility.
Here, too, it is apparent that there is a price for that return, which is volatility.
FORBES: European High-Yield Bond Market: Performance, Though Volatility
Once again, the value of dividends enhanced total return and cushioned downside volatility during an extremely turbulent quarter.
FORBES: Agency Mortgage REITs: What Are The Analysts Saying?
These are the volatility and return measurements with which investors are most familiar.
Clients who use this ratio may end up flocking to a manager who earns a relatively modest return with very low volatility.
ECONOMIST: Smooth returns can be a sign of danger for investors
But it also allows investors to craft allocations that are along the efficient frontier, getting the most return for the least volatility.
Hybrid securities, designed to produce a steady return along with reduced volatility.
For any portfolio that includes an allocation to gold, there is a better portfolio, one with a higher expected return or a lower volatility that has a zero allocation to gold.
The return of stock market volatility after some relatively calm months may be exciting for some traders on Wall Street, but it new data shows that the individual investor is content to take some chips off the table here.
Such investments fall in the lower right quadrant of high volatility and low return.
In theory, that reduces your dependence on how each investment performs, minimizing volatility and maximizing return.
The table is pretty conclusive: The fewer times you rebalance, the greater the return and the greater the volatility.
Its called a liquidity premium and its variance over time drives both difference in volatility and average return between investment vehicles.
The efficient frontier is the blending of all possible components into portfolios with the highest possible return and the lowest possible volatility.
The diversification effect that comes from investing in countries with low cross-correlations can result in both an increase in return and a reduction in volatility at the total portfolio level over the long term.
Most efficient in this case means getting the best possible return for a given amount of volatility.
However, the compounded annualized return (what you actually earned once volatility was factored in) was about 7.8%.
FORBES: Why Your Investment Returns Could Be Lower Than You Think
My focus shifted from rates of return, leading market indicators, portfolio volatility, and news headlines to long-term goals and overall strategy.
FORBES: Two Questions No One Ever Asks Their Financial Advisor But Needs To
Individual investors placed a greater emphasis on return of capital last month because of the volatility in the stock markets.
Doing this reduces portfolio volatility and can actually improve expected return.
Gold, using the 4% return, had a 16.5% volatility across currencies, meaning it was more volatile in some currencies, but lower in others, the study showed.
For the past few decades the conventional wisdom in finance has been that investors don't receive any extra return for putting up with higher levels of raw volatility but that they do enjoy excess returns for owning high-beta stocks.
For instance, he said when looking at the U.S. Treasury bond, the return is a little more than 5% and the volatility is about 4.5%, which is considered very stable.
应用推荐