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Travis Morien
Compass Financial Planners Pty Ltd
travis@travismorien.com
http://www.travismorien.com
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nvestment is the
obvious choice« « but add
risk, is the
choice still
obvious?
m
m

m would die
out through
lack of takers!

When two investments appear to offer identical risk, investors will prefer to
buy the higher returning one. f the market is peopled by reasonably well
informed investors, there simply won¶t be any high returning low risk
investments left and nobody will buy high risk assets with a low expected
return.
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6Correlation´ is the word given to the extent to which assets move together, this is
measured with statistical formulae. Correlations can range from -1 (perfectly
negatively correlated) through to +1 (perfectly positively correlated).
f asset m tends to move in the opposite direction to asset then these two assets are
said to have 6negative correlation´, and they can be highly effective at cancelling out
each other¶s volatility. f the assets both trend upwards over the longer term a
combination of them will have a return equal to the average of the two assets¶ returns
but with substantially reduced volatility.

Negatively correlated assets cancel the greatest


amount of each other¶s volatility.
      

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|eturn Efficient portfolios on or near the efficient frontier

|isk
nefficient portfolios below efficient frontier
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|ecommended reading
‡˜    
   by âohn mogle
‡     
 by William mernstein
‡ 
   by William mernstein
‡
 
 
  by murton ¢. Malkiel
‡     by menjamin ¢raham
‡˜  

   
 !
  by David Dreman
‡
  ! 

"  #  by Peter mernstein
‡$    by âohn Neff
Web sites of interest
http://www.stanford.edu/~wfsharpe/art/active/active.htm
http://www.stanford.edu/~wfsharpe/art/talks/indexed_investing.htm
http://marriottschool.byu.edu/emp/srt/passive.html
http://www.diehards.org/
http://www.investorsolutions.com/ rticleShow.cfm?Link=art_t_Dont_¢et_Much_
Worse_Than_This.cfm
http://www.investorhome.com/cherry.htm
http://library.dfaus.com/faqs/
http://library.dfaus.com/articles/dimensions_stock_returns_2002/
http://www.indexfunds.com/
http://faculty.haas.berkeley.edu/odean/
http://www.efficientfrontier.com/
http://www.tweedy.com/library_docs/papers.html
http://www.travismorien.com
Disclaimer:
nformation contained herein has been obtained from sources
believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not
be considered investment advice or an offer of any security for sale.
nvestors should seek the advice of their own qualified advisor
before investing in any securities.
Please note that returns quoted in this article are based on historical
performance of indexes, not actual products. |eal world products
(index funds) are available to track the majority of indexes quoted
in this presentation, but returns will be affected by fees and taxes.
Past returns are not a reliable indicator of future returns.