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Sandy Warrick, CFA  Risk and Return for Private Investors
What do Private Clients Care About? ,[object Object],[object Object],[object Object]
Private Investors have Needs ,[object Object],[object Object],[object Object],[object Object]
Private Investors have Goals ,[object Object],[object Object]
Private Investors have Aspirations ,[object Object],[object Object],[object Object]
How Do Planners Design Portfolios for Clients? ,[object Object],[object Object],[object Object],[object Object]
Is There a Better Way than Buckets? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Warning: There is Math! ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Here is the Math: L :  leverage.  :   the annualized volatility S : skewness of returns  K : kurtosis of returns
Leverage = Assets / (Assets – Liabilities)
What is   ? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
What is Skew? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
What is Kurtosis? ,[object Object],[object Object],[object Object],[object Object]
Market Risk Premium: Consumption Models Economists have attempted to estimate what the market risk premium  should be  using  consumption based  models. Their conclusion is that the historic risk premium is higher than it should be, That’s a “puzzle” The 2007-2008 might have solved the puzzle – risk is higher and returns are lower when we include these years!
Equity Risk Premium: Consumption Models Economists sometimes call this the equity risk premium and it’s the same thing. Regardless of what you call it, it’s still a “puzzle”
The Relation between Return and Risk Another name for the equity risk premium is “the market price of risk.”
Historic Excess Returns vs. Risk Cash, Bond, Stock 1970 to 2009
Risk and Return ,[object Object],[object Object],[object Object]
A Bit More Math: Excess Return: Return higher than the risk free rate. Slope: Increased in return for an increase in risk L :  leverage.  :   the annualized volatility S : skewness of returns.  K : kurtosis of returns
Capital Market Assumptions ,[object Object],[object Object],[object Object],[object Object]
Aggressive Investor: Leverage = 1 ,[object Object],[object Object],[object Object],[object Object],[object Object]
Moderate Investor: Leverage = 2 ,[object Object],[object Object],[object Object],[object Object]
Conservative Investor: Leverage = 3 ,[object Object],[object Object],[object Object],[object Object]
Risk Adjusted Return vs. Risk
How Do We Classify Investors? ,[object Object],[object Object],[object Object],[object Object]
We Can Use an Expert System with a Questionnaire ,[object Object],[object Object],[object Object]
Suitability
Model Portfolio   Conservative Moderate Aggressive Cash 15.9% 1.2% 0.2% Bonds 58.1% 42.0% 8.3% Stock 25.4% 56.4% 84.1% Alternatives 0.7% 0.4% 7.4% Risk: 5.7% 9.7% 14.0% Return: 5.4% 6.2% 7.0%
Asset Allocation vs. Risk Tolerance
Risk vs. Return for Model Portfolios

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Risk and Return

  • 1. Sandy Warrick, CFA Risk and Return for Private Investors
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7.
  • 8.
  • 9. Here is the Math: L : leverage.  : the annualized volatility S : skewness of returns K : kurtosis of returns
  • 10. Leverage = Assets / (Assets – Liabilities)
  • 11.
  • 12.
  • 13.
  • 14. Market Risk Premium: Consumption Models Economists have attempted to estimate what the market risk premium should be using consumption based models. Their conclusion is that the historic risk premium is higher than it should be, That’s a “puzzle” The 2007-2008 might have solved the puzzle – risk is higher and returns are lower when we include these years!
  • 15. Equity Risk Premium: Consumption Models Economists sometimes call this the equity risk premium and it’s the same thing. Regardless of what you call it, it’s still a “puzzle”
  • 16. The Relation between Return and Risk Another name for the equity risk premium is “the market price of risk.”
  • 17. Historic Excess Returns vs. Risk Cash, Bond, Stock 1970 to 2009
  • 18.
  • 19. A Bit More Math: Excess Return: Return higher than the risk free rate. Slope: Increased in return for an increase in risk L : leverage.  : the annualized volatility S : skewness of returns. K : kurtosis of returns
  • 20.
  • 21.
  • 22.
  • 23.
  • 25.
  • 26.
  • 28. Model Portfolio   Conservative Moderate Aggressive Cash 15.9% 1.2% 0.2% Bonds 58.1% 42.0% 8.3% Stock 25.4% 56.4% 84.1% Alternatives 0.7% 0.4% 7.4% Risk: 5.7% 9.7% 14.0% Return: 5.4% 6.2% 7.0%
  • 29. Asset Allocation vs. Risk Tolerance
  • 30. Risk vs. Return for Model Portfolios