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1、CHAPTER 12CHOOSING AN INVESTMENT PORTFOLIOObjectives To understand the process of personal investing in theory and in practice. To build a quantitative model of the tradeoff between risk and reward.Outline 12.1The Process of Personal Portfolio Selection 12.2The Trade-off between Expected Return and
2、Risk 12.3Efficient Diversification with Many Risky Assets Summary There is no single portfolio selection strategy that is best for all people. Stage in the life cycle is an important determinant of the optimal composition of a persons optimal portfolio of assets and liabilities. Time horizons are im
3、portant in portfolio selection. We distinguish among three time horizons: the planning horizon, the decision horizon, and the trading horizon. In making portfolio selection decisions, people can in general achieve a higher expected rate of return only by exposing themselves to greater risk. One can
4、sometimes reduce risk without lowering expected return by diversifying more completely either within a given asset class or across asset classes. The power of diversification to reduce the riskiness of an investors portfolio depends on the correlations among the assets that make up the portfolio. In
5、 practice, the vast majority of assets are positively correlated with each other because they are all affected by common economic factors. Consequently, ones ability to reduce risk through diversification among risky assets without lowering expected return is limited. Although in principle people ha
6、ve thousands of assets to choose from, in practice they make their choices from a menu of a few final products offered by financial intermediaries such as bank accounts, stock and bond mutual funds, and real estate. In designing and producing the menu of assets to offer to their customers these inte
7、rmediaries make use of the latest advances in financial technology. Instructors ManualChapter 12 Page 144Solutions to Problems at End of Chapter1. Suppose that your 58-year-old father works for the Ruffy Stuffed Toy Company and has contributed regularly to his company-matched savings plan for the pa
8、st 15 years. Ruffy contributes $0.50 for every $1.00 your father puts into the savings plan, up to the first 6% of his salary. Participants in the savings plan can allocate their contributions among four different investment choices: a fixed-income bond fund, a “blend” option that invests in large c
9、ompanies, small companies, and the fixed-income bond fund, a growth- income mutual fund whose investments do not include other toy companies, and a fund whose sole investment is stock in the Ruffy Stuffed Toy Company. Over Thanksgiving vacation, Dad realizes that you have been majoring in finance an
10、d decides to reap some early returns on that tuition money hes been investing in your education. He shows you the most recent quarterly statement for his savings plan, and you see that 98% of its current value is in the fourth investment option, that of the Ruffy Company stock.a.Assume that your Dad
11、 is a typical risk-averse person who is considering retirement in five years. When you ask him why he has made the allocation in this way, he responds that the company stock has continually performed quite well, except for a few declines that were caused by problems in a division that the company ha
12、s long since sold off. In addition, he says, many of his friends at work have done the same. What advice would you give your dad about adjustments to his plan allocations? Why?b.If you consider the fact that your dad works for Ruffy in addition to his 98% allocation to the Ruffy stock fund, does thi
13、s make his situation more risky, less risky, or does it make no difference? Why?SOLUTION:a.Dad has exposed himself to risk by concentrating almost all of his plan money in the Ruffy Stock fund. This is analogous to taking 100% of the money a family has put aside for investment and investing it in a
14、single stock. 父亲将自己完全置身于冒险中，通过将几乎所有的计划资金投资于 Ruffy 存货基金。这就相当于将一个家庭所有的金钱 100%的用于投资且是单一 的股票投资。 First, Dad needs to be shown that just because the company stock has continually performed quite well is no guarantee that it will do so indefinitely. The company may have sold off the divisions which produce
15、d price declines in the past, but future problems are unpredictable, and so is the movement of the stock price. “Past performance is no guarantee of future results” is the lesson.Instructors ManualChapter 12 Page 145首先，父亲需要被展示这个公司的股票持续良好的态势，并且（is no guarantee that it will do so indefinitely）这个公司在过去也
16、许已经出售完价 格下跌的部分，但是未来的问题是不确定的，股票接个的变动也如此。 “过去的表现并不能保证未来的结果。”就是讲述这样的道理。 Second, Dad needs to hear about diversification. He needs to be counseled that he can reduce his risk by allocating his money among several of the options available to him. Indeed, he can reduce his risk considerably merely by moving all of his money into the “blend” fund because it is diversified by design: it has a fixed-income component,
