[y] modern portfolio theory, whose insights will enable you to reduce risk while possibly earning a higher return
[o] investors can increase their returns by assuming a certain kind of risk
[i] psychology, not rationality, rules the market, and that there is no such thing as a random walk
[z] they should constitute the core of all portfolios
[y] The efficient-market hypothesis explains why the random walk is possible.
[i] Because of the actions of the pros, the prices of individual stocks quickly reflect all the news that is available.
[b] Samuel Butler
[z] the method of beating the market, they say, is not to exercise superior clairvoyance but rather to assume greater risk
[y] The dividend of the company may be cut
[s] Thus, financial risk has generally been defined as the variance or standard deviation of returns.
[j] Although the pattern of historical returns from individual securities has not usually been symmetric, the returns from well-diversified portfolios of stocks are at least roughly symmetric.
[v] Thus, in two-thirds of the months the returns from this portfolio were between +5½ percent and –3½ percent, and 95 percent of the returns were between 10 percent and –8 percent.
[y] October 1987 is the most dramatic change in stock prices during a brief period since the 1930s
[y] there are ways in which investors can reduce risk.
[s] What Markowitz discovered was that portfolios of risky (volatile) stocks might be put together in such a way that the portfolio as a whole could be less risky than the individual stocks in
[s] quadratic programming
[o] although both companies were risky (returns were variable from year to year), the companies were affected differently by weather conditions
[j] negative covariance
[z] most investors will realize that when the market gets clobbered, just about all stocks go down
[t] anything less than perfect positive correlation can potentially reduce risk
[y] can there be too much of a good thing?
diversification: yes
[v] fifty equal-sized and well-diversified U.S. stocks
[v] total risk is reduced by over 60 percent
[y] increases in the price of oil and raw materials have a negative effect on Europe, Japan, and even the United States,
[y] oil price increases have a very positive effect on Indonesia and oil-producing countries in the Middle East.
[y] international diversified portfolio tends to be less risky than the one drawn purely from U.S. stocks
[y] EAFE (developed foreign country
[y] The paradoxical result of this analysis is that overall portfolio risk is reduced by the addition of a small amount of riskier foreign securities.