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A Practical Demonstration of the Value of Portfolio Theory – Seeking Alpha

Ben Stein and I wrote Yes, You Can Supercharge Your Portfolio to demonstrate the practical value of Modern Portfolio Theory to a mass audience. It had long struck us that many investors still operate under a pre-Markowitz paradigm, trying to outperform the market by picking hot stocks and five-star mutual funds. In the book, we argue that a better approach is to seek massive diversification among and within asset classes in order to attain the best risk/return tradeoff for a portfolio. We further recommend that portfolios should be checked through forward-looking Monte Carlo simulations, and provide some practical examples. In contrast, merely extrapolating from historical returns to an asset allocation can lead to poorly-performing allocations, as shown in William Bernstein’s The Intelligent Asset Allocator. Forward-looking models can provide more realistic estimates of future risk and return.

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