The Proper Asset Allocation Of Stocks And Bonds By Age

Endless Variety Of Gouda CheeseTo start, there is no “correct” asset allocation by age. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between. When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio. Meanwhile, you can have another portfolio in an after-tax brokerage account like E*Trade that is much smaller where you punt stocks. If you blow up your E*Trade account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.

I ran my current 401K through Personal Capital to see what they thought about my aggressive asset allocation. To no surprise, the below chart is what they came back with. I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

portfolio-analysis

I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai. We will talk through each model to see whether it fits your present financial situation. Your asset allocation will switch over time of course.

Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes. Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.

HISTORICAL RETURNS FOR STOCKS

SP500-historical

S&P 500 Historical Returns Chart

Notes

* The 10-year historical average return for the S&P 500 index is roughly 7%. The 60 year average is also roughly 7% after the most recent 38.5% drubbing in 2008. 2012 closed out the year up 13.5% for your reference.

* The S&P 500 has been extraordinarily volatile over the past 20 years. The golden age was between 1995-1999.  2000-2002 saw three years of double digit declines followed by four years of gains until the economic crisis. In other words, there looks to be a 3-5 year run until performance reverses so watch out.

* The index is still roughly 50 points off its 1,551 peak. We haven’t gone anywhere for over a decade if we exclude dividends. I think we’ll reach the peak in 2013, but we shall see.

HISTORICAL RETURNS FOR BONDS

10 Year Note Yield Historical Chart

* When things get good for stocks, they can get really good. Don’t forget to sell!

Bonds vs. Stock Historical Growth Chart Comparison

Bonds-vs-Stocks

Notes

* From the first chart, you can see that the 10-year Bond Yield has been going down since 1982. In other words, 10-year bond prices have been going up for 30 years given there is an inverse relationship, making US Treasuries one of the best risk free performers.

* The second chart shows how stocks have trounced bonds since 1994. Unfortunately the chart cuts off at 2008 where the crisis occurs because this chart is from a bond shop called BondGroup. Their goal is to sell bonds, not stocks.

* Bonds have never returned more than 20% in one year. The two times the BarCap US Aggregate index came close was in 1991 and in 1995 when inflation was in the high single digits. Inflation is now around 1-2%, which puts a cap on bond yields.

CONVENTIONAL ASSET ALLOCATION MODEL

The classic recommendation for asset allocation is to subtract your age from 100 to find out how much you should allocate towards stocks. The basic premise is that we become risk averse as we age given we have less of an ability to generate income. We also don’t want to spend our older years working. We are willing to trade lower returns for higher certainty. The following chart demonstrates the conventional asset allocation by age.

Candidates:

* You believe in conventional wisdom and don’t want to overcomplicate things.

* You expect to live to the median age of 78 for men and 82 for women.

* You are not very interested in the stock market, bond market, or economics and would rather have someone manage your money instead.


Conventional Asset Allocation Model
Age Stocks Bonds
0-18 100% 0%
20 80% 20%
25 75% 25%
30 70% 30%
35 65% 35%
40 60% 40%
45 55% 45%
50 50% 50%
55 45% 55%
60 40% 60%
65 35% 65%
70 30% 70%
75-110 25% 75%
Source: FinancialSamurai.com

NEW LIFE ASSET ALLOCATION MODEL

The New Life asset allocation recommendation is to subtract your age by 120 to figure out how much of your portfolio should be allocated towards stocks. Studies show we are living longer due to advancements in science and better awareness about how we should eat. Given stocks have shown to outperform bonds over the long run, we need a greater allocation towards stocks to take care of our longer lives. Our risk tolerance still decreases as we get older, just at a later stage.

Candidates:

* You plan to live longer than the median age of 79 for men and 82 for women.

* You’re not that interested in actively managing your own money, but depend on your portfolio to live a comfortable retirement.

* You plan to work until the conventional retirement age of 65, plus or minus 5 years.

* You are a health fanatic who works out regularly and eats in a healthy manner. Sugar is synonymous with poison, while raw is synonymous with utopia.


New Life Asset Allocation Model
Age Stocks Bonds
0-18 100% 0%
20 100% 0%
25 95% 5%
30 90% 10%
35 85% 15%
40 80% 20%
45 75% 25%
50 70% 30%
55 65% 35%
60 60% 40%
65 55% 45%
70 50% 50%
75-110 40% 60%
Source: FinancialSamurai.com

SURVIVAL ASSET ALLOCATION MODEL

The Survival Asset Allocation model is for those who are risk averse. The 50/50 asset allocation increases the chances your overall portfolio will outperform during a stock market collapse because your bonds will be increasing in value as investors flee towards safety. Bonds can also rise when stocks rise as you’ve seen in the historical chart above. That said, bonds sold off during the 2008-2010 economic crisis because investors lost all confidence in stocks and bonds. Money fled to money market funds instead.

Candidates:

* You believe the stock market has a higher chance of underperforming bonds, but are not sure given historical data points to the contrary.

* You are within 10 years of full retirement and do not want to risk losing your nest egg.

* You depend on your portfolio to be there for you in retirement due to a lack of alternative income streams.

* You are very wary of the stock market because of all the volatility, scams, and downturns.

* You are an entrepreneur who needs some financial safety just in case your business goes bust.


Survival Asset Allocation Model
Age Stocks Bonds
0-18 50% 50%
20 50% 50%
25 50% 50%
30 50% 50%
35 50% 50%
40 50% 50%
45 50% 50%
50 50% 50%
55 50% 50%
60 50% 50%
65 50% 50%
70 50% 50%
75-110 50% 50%
Source: FinancialSamurai.com

NOTHING TO LOSE ASSET ALLOCATION MODEL

Given stocks have shown to outperform bonds over the past 60 years, the Nothing To Lose Asset Allocation model is for those who want to go all-in on stocks. If you have a long enough time horizon, this strategy might suite you well.

Candidates:

* You are rich and don’t count on your stock portfolio to survive now or in retirement.

* You are poor and are willing to risk it all because you don’t have much to risk.

* You have tremendous earnings power that will continue to go up for decades.

* You are young or have an investment horizon of at least 20 more years.

* You believe you are smarter than the market and can therefore choose sectors and stocks which will consistently outperform.

* Your Money Strength is strong.


Nothing To Lose Asset Allocation Model
Age Stocks Bonds
0-18 100% 0%
20 100% 0%
25 100% 0%
30 100% 0%
35 100% 0%
40 100% 0%
45 100% 0%
50 100% 0%
55 100% 0%
60 100% 0%
65 100% 0%
70 50% 50%
75-110 50% 50%
Source: FinancialSamurai.com

FINANCIAL SAMURAI ASSET ALLOCATION MODEL

The Financial Samurai model is a hybrid between the Nothing To Lose model and the New Life model. I believe stocks will outperform bonds over the long run, but we’ll see continued volatility over our lifetimes. Specifically, I’m preparing for a new normal of 5 to 7% returns for stocks (from 8-10% historically) and -5 to 4% return on bonds from 4-7% historically. In other words, I believe bonds are expensive and have a higher risk of staying flat or losing money for investors who do not hold to maturity.

Candidates:

* You have multiple income streams.

* You are a personal finance enthusiast who gets a kick out of reading finance literature and managing your money.

* You are not dependent on your portfolio in retirement, but would like it to be there as a nice bonus.

* You enjoy studying macroeconomic policy to understand how it may affect your finances.

* You are an early retiree who won’t be contributing as much to their portfolios as before.


Financial Samurai Asset Allocation Model
Age Stocks Bonds
0-18 100% 0%
20 100% 0%
25 100% 0%
30 100% 0%
35 80% 20%
40 80% 20%
45 80% 20%
50 70% 30%
55 70% 30%
60 70% 30%
65 60% 40%
70 60% 40%
75-110 50% 50%
Source: FinancialSamurai.com

THE RIGHT ASSET ALLOCATION ALL DEPENDS ON YOU

By providing five different asset allocation models, I hope you are able to identify one that fits your needs and risk tolerance. Don’t let anybody force you into an uncomfortable situation. Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. When it comes to investing, you need to calculate realistic risk reward scenarios and invest accordingly.

I encourage everyone to take a proactive approach to their retirement portfolios. Ask yourself the following questions to determine which asset allocation model is right for you:

* What is my risk tolerance on a scale of 0-10?

* If my portfolio dropped 50% in one year, will I be financially OK?

* How stable is my primary income source?

* How many income streams do I have?

* Do I have an X Factor?

* What is my Money Strength?

* What is my knowledge about stocks and bonds?

* How long is my investment horizon?

* Where do I get my investment advice and what is the quality of such advice?

Once you’ve answered these questions, sit down with a loved one to discuss whether there is congruency with your answers and how you are currently investing. Just because we’ve been in a four year bull run doesn’t mean you’re now an investment guru. It’s important not to overestimate your abilities when it comes to investing. We all lose money eventually, it’s just a matter of when and how much. Let’s just hope the party continues in 2014 and beyond!

Recommendation To Help Achieve Financial Independence

One of the best ways to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.

One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. Aggregate all your financial accounts in order to get a good over view of your net worth and start building those passive income streams! It only takes a minute to sign up.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

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Comments

  1. says

    I never thought of a “neutral” rating as a lack of conviction, statistically, most stocks are going to perform around average, so “neutral” is just a way of saying, “This stock is likely to neither out- nor underperform. But because my employer has a vested interest in us maintaining coverage on this company, I will publish this report that shoes nothing earth shattering.”

  2. says

    Interesting, why do you think bonds will have a negative return over the long run? Wouldnt debt still retain value as someone will always want to lend money? Further, I think that sitting on the other side of this debt bubble, lending standards have increased and may stay strict for quite some time.

    Personally I’m not in bonds much as I subscribe more towards the riskier end of the spectrum. I’m 28 and my investment style probably falls somewhere in between the “Financial Samurai” model and the “New Life” model.

    • says

      Because of an asset shift away from bonds into riskier assets like stocks. If you look at the 10-year bond movement in recent levels, anybody who bought a month ago is losing money. The charts will give you some idea.

      • Andrew @ Listen Money Matters says

        But that’s only if you sell it though, no? I’m a buy and hold guy so I guess I never consider the alternative much. I don’t think I will ever get out at the peak or buy at the bottom so I don’t try, I would rather make decisions on good fundamentals and have enough buffer to ride out the storms.

  3. nbsdmp says

    First of all, I don’t think there are any wrong answers here because nobody knows what the future will hold. My opinion thought is once you’ve made your nut, why would you risk so much of it. I understand you have to outpace inflation and keep skin in the game, but I think there is nothing wrong with hitting singles and being the tortoise that finishes the race with the least risk possible with an acceptable rate of return. Is your allocation a percentage of total net worth, and do you consider the equity of business ventures and real estate in this percentage?

  4. says

    I have a pretty low risk tolerance. I just hate losing money which is also why I don’t gamble. I loved all the analysis and data points that you included in this post. Volatility in stocks is nuts. I’m glad I’m not a portfolio manager or I’d be a major stress case. I have a fairly large fixed income allocation and don’t have any current plans to change it. I am thinking about getting more structured notes though as my CDs expire since your recent post got wheels turning.

  5. says

    I like the Financial Samurai asset allocation plan. However, once I hit 65, I probably would increase my bond allocation quite a bit. When you get older, your risk tolerance usually reduce quite a bit.
    My bond allocation went down a lot after I rolled over my 401k. I really need bump up my bond allocation, but the rate is so low right now.

  6. says

    I think it’s important to discuss what risk tolerance actually means. Volatility, for most people, isn’t really risk. How much your portfolio wiggles at 30 doesn’t have much to do with your risk of total loss at 70 years old. Volatility should be feared when you’re a net seller, not necessarily when you’re a net buyer.

    It’s one thing to be conservative, but it has to be met with either lower retirement expectations or larger retirement contributions. A super conservative portfolio of treasuries and corporate bonds just means one big risk: you go broke in retirement. It’s another to be overly aggressive when you’re selling and find yourself in a 2009 scenario selling stocks at prices not seen for more than a decade.

    If I had to pick one for life, I’d go 75% stock (50% S&P500, 25% consumer staples/utilities) and then 25% fixed income. Rebalance annually and keep the allocation forever. Ideally have some other kind of form of income (1-2 rental units) when nearing retirement for balance.

    • says

      As I sit here in retirement today, I can unequivocally say that rental income is fantastic. My rental income is supporting my lifestyle as I just bank/reinvest any stock returns and dividends. Rental income just takes time.

  7. says

    I have a pretty high risk tolerance, and right now my asset allocation most closely resembles the ‘new life’ model although my mix will probably trend more aggressive compared to the chart at older ages.

    From conversations I’ve had I think this past recession really put some permanent doubt in peoples minds & a lot of people will be trending to a more conservative going forward than they might have in the past.

    • says

      No doubt the massacre of 2009/2010 is going to scar the existing generation of investors for a very long time, myself included.

      My #1 tenet in investing is not to lose money! If I can’t make money, fine. I just refuse to lose.

  8. says

    Sam, I’m finding myself leaning more toward the financial samurai model. Let me answer some questions and see:

    * What is my risk tolerance on a scale of 0-10?

    Risk tolerance is a 8 – I like to take the risk because of the challenge and learning required to become a successful investor.

    * If my portfolio dropped 50% in one year, will I be financially OK?

    Yes, I would be ok. Since I have my emergency fund built up and I have a stable job, I can afford the loss.

    * How stable is my primary income source?

    So far so good. Ancestry.com is a profitable company with no signs of letting up. Were that to change, I would reevaluate.

    * How many income streams do I have?

    I have Stocks/Dividends, Prosper.com interest, Lunch money from Google Adsense for a few websites that I don’t update anymore, a few hundred dollars monthly from a project that is doing well now with my twin brother, YouREview.Net, my day job, and in time, my new project I’m working on this year

    * Do I have an X Factor?

    If the X Factor is a blue sky scenario/shoot for the moon type of thing, then I hope it is the new project I am working on this year.

    * What is my Money Strength?

    It’s at a B- right now. I haven’t landed real estate as an additional income source.

    * What is my knowledge about stocks and bonds?

    If Apple does indeed go up from here on out, not as much as I thought. I’m at about a C right now in my knowledge. I have continued work to do to understand that market better.

    * How long is my investment horizon?

    I plan on investing for 30+ years without having to take money out.

    * Where do I get my investment advice and what is the quality of such advice?

    I get my advice from you Sam, and other members of the Yakezie. It’s the best I’ve seen so far.

    – I really like the stock/dividend and prosper investing model. I can check a few things in my basement, in my underwear and the bulk of the work is using brain power. I’m also bullish in getting my own business to work, but know that will be more difficult.

    • says

      Hi Jeremy,

      I think you are doing great! With your time horizon, skills as a developer, and your initiative to work on multiple income streams, you should be fine. The FS model seems appropriate, but only you can decide.

      The one thing to note is that things change all the time. You may think you can work for the next 20 years no problem, but I think you’ll be surprised if you work on your X Factor. You never know. But you’ll definitely never know if you don’t try. My article on Yakezie.com is something I’ve been thinking of trying. Worth a shot? Maybe! Gathering feedback now and need a developer.

      Best,

      Sam

  9. says

    I consider more than risk tolerance with my asset allocation. In retirement (this time) I will have all my basics covered by Social Security and a pension. That represents the fixed portion of my retirement. My stock market portfolio asset allocation is intended to shield me against a very volatile market and still be a growth portfolio. I expect to live 30 years in retirement and want sufficient funds to support my wants in life. In the next five years, I do expect to shift more funds into TIPS and dividend paying stocks (funds). I think I will stop at 20-25% though. This plan could change, but that is what it is today.

  10. Shaun says

    Ive always felt avoiding the latest meltdown in stocks is really the best investment strategy. Bear markets typically last .5-2 years and then you get a bull maket for several years until your next bear market and the cycle repeats itself. So simplistically the closer you are to the last bear market time-wise the more bullish you should be on stocks. I’m bullish on stocks in 2013 but am not as bullish as 2012. I’m slowly decreasing the percentage I have invested in stocks every year from now until the next bear market where I’ll try to buy back in and repeat the cycle.

      • Shaun says

        Haha well I cant tell you when its going to start but the idea is the farther you get from 2009 the more cautious you have to be when the market enters a downtrend (just follow moving averages for simplicity). By now were far enough removed that I wouldnt be 100% in stocks but not far enough removed where I’m overly worried about a crash. There will be another crash someday in the future though and even if you only manged to save half your portfolio from the effects of it thats a huge deal especially if you can buy back in a year later anywhere close to the bottom.

  11. says

    I really like how you compared different models, but I’m disappointed that none of the models, with the possible exception of the FS model, really seem to be built for extreme savers. If my envelope math is anywhere near correct, I can go 100% stocks for about the next 10 years, growing a dividend income stream large enough to cover all of my expenses. I can then look into diversification across additional investment classes, provided that they produce income. This probably puts me closer to the Financial Samurai model.

    • says

      The “Nothing To Lose Model” is 100% stocks until age 65 or whenever you no longer want to work, or have all your expenses covered by passive income.

      The one key thing I want everybody to know is that we will all lose money eventually. Nobody can consistently beat the market, no matter how smart we think we are. Everything is easier said than done.

  12. says

    I ‘m definitely with the “nothing to lose” model. The return on government bonds currently are so low that you are actually losing money investing there. Certain corporate bonds do better, but again, its pretty limited. I’m also hopeful that my dividend stream in solid, reliable companies will grow large enough to cover my expenses such that I won’t need bonds into my retirement. You also have an automatic inflation hedge built in with dividends that you dont get with bonds (unless they happen to be TIPS- treasury inflation protected). Moving some of your income to bonds when you hit 65 does make some sense though, the time to take risk has probably passed you by at that point.

    • says

      Indeed. At 65, or thereabouts… hopefully we’ve all developed a big enough nut where it’s all about living off the passive income generation rather than relying on capital increases.

  13. says

    We allocate our assets, our stocks, bonds, and cash, because we want to get the return that we are aiming for while minimizing the risk that we are exposed to. You need to decide how to divide your assets and choose an investment that will go with how you divide your money.

  14. says

    Thanks for reminding us about the asset allocation and its importance in relation to risk tolerance. I’m in my mid-30′s and have chosen 75% stocks, 25% bonds/cash equivalents. I probably need to increase my allocation in stocks. Thanks for the reminder.

  15. Newbie says

    Hi FS,

    Just ran into this site a couple of days ago after getting serious about my future and my family’s future. I’m totally hooked to the site, reading articles after articles trying to grasp everything I’m reading. I’m 24 years old, engaged and have a 1 year old son. Unfortunately I’m not doing to good on the savings side and am on my way towards creating a savings plan now. I’m curious to know how I can start to scratch the surface of investing in Stocks and Bonds. Maybe you already have an article on this? (for example if you recommend trying to start off with etrade or things of that nature) Or should I not even consider this until I have some money saved up?

    just for added details I make $40k a year (and drowning in student loans lol.. over $47k)

    My apologies in advance for bombarding you with questions lol.

    Thanks for taking the time out to read this! Any advise is appreciated.

    • says

      Welcome to my site! Feel free to subscribe.

      With the info you have provided, I would simply focus on contributing to your 401k/IRA and maxing those out first before spending more time in after tax investing. I’d also focus on paying down that debt.

  16. says

    I think Bond bubble is brewing right now. Fed is arbitrarily keeping the interest low by printing money, but sooner or later, interest rates will go higher, much higher. When that happens, having a large % allocated to bond in your late age can be lethal.

    In my humble opinion, it doesn’t make sense to allocate more than 20-30% to bonds no matter how old you are. There are better ways to generate income with stocks than bonds.

  17. D says

    I am a new hire at a large company with a great salary and am starting to contribute to my 401k from day 1. Ofcourse I will be maxing it out, receiving all employer contributions, etc., etc., but I am having trouble deciding where to allocate my 401k funds. I want to start off with high-risk high reward funds, seeing as I potentially have 30 to 40 years to invest. My current plan is to start out with almost 100% stocks. I’ve got 40% in a 30 year retirement fund (high risk), 40% in a low-fee S&P 500 index fund, 10% in emerging markets, and 10% in international stock (Europe & Pacific). I am very new to investing, but have been following your blog for some time. I’ve seen the bull market and it’s earnings the last few years and am wondering if I am now at a peak as I start investing. I am withholding my post tax income for the next 6mo to a year in a money market as I save up for a down payment on a condo (in a large city on the west coast). Being new to investing and not formally educated in finance and economics, I am having a hard time predicting any markets or even understanding trends of current markets (I’m still doing much research). What is your opinion on 401k allocation for a new hire? Also, as a side note, how would you consider the housing market over here on the west coast in the large cities? Prices have risen quite a bit since the real estate collapse and I missed buying during this time (still studying in college), but am wondering if it is still beneficial to jump in the housing market before it gets even pricier. My best guess would be to go for it because I doubt the banks would make the same mistake twice so soon, which would allow for real estate markets to steadily rise again. But like I said, I am no expert by any means.

    Thanks!

    D

  18. Lanna says

    Hello,

    I am new to the investment game….I am about to become eligible for my company’s 401k in which they match 50 cents to the dollar up to 8% of my contribution. My salary is only $33,500 but I have my annual review tomorrow so hopefully a raise will be coming. I am curious what your advice is as far as how aggressive I should be with where I put my money in my 401k. My company has about 12-15 funds where I can put my money ranging from low to high risk. We also have the option of just putting it into a moderate, growth or aggressive balanced portfolio where the investment company we use picks stocks/bonds for you.

    I also have some money in my savings account that I am considering putting into a separate IRA as it is just sitting there accruing next to nothing. I have about $10k saved but I wouldn’t want to put it all in the IRA…suggestion on how much? Or if I should even invest this money?

    If it helps…I am 35 yrs old.

  19. joe says

    Look at that S&P historical chart.. Today really does look like 60′s and 70′s

    I wonder if we are in “1973″ setting up for another 1975 pull back?
    http://stockcharts.com/freecharts/historical/djia19601980.html

    chartists believe that long term bull markets come after a prolonged range bound period (10-20 years) and we must retest the low of the range once more before a 1980′s/90′s bull. Secretly I hope so I need to reason to sell bonds and go overweight stocks…

  20. NotJackBogle says

    Hey Samurai–nice blog.

    One comment on asset allocation models: According to theory, (right I know), the ideal portfolio for “everyone” is the tangency portfolio. With a typical mix of S&P 500/5 year treasuries (and I know it doesn’t have to be just these), if you look at diagrams, the tangency portfolio generally seems to be about 50/50, maybe closer to 45/50. This gives you the highest Sharpe Ratio (unit of return/unit of risk). Then what you are supposed to do if you want a higher return/higher risk is leverage at the risk free rate, if you want less risk you add the appropriate amount of cash reserves to your portfolio (and get less return), but this maintains the efficiency of the portfolio by keeping the Sharpe Ratio as high as possible. This isn’t really a point I see raised very often in AA discussions but it is relevant since the whole underlying theory of caring about an AA of the portfolio in the first place comes from MPT & CAPM.

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