0:00.0	Welcome to money for the rest of us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it.
0:10.0	I'm your host David Stein, and today is episode 496. It's titled Are You Taking
0:16.9	Enough Aspirational Risk? In 1952 Harry Markowitz of the Rand Corporation published a paper titled Portfolio Selection in the Journal of Finance.
0:29.0	The paper introduced what came to be known as Modern Portfolio Theory, Markowitz eventually garnered a
0:35.9	Nobel Prize for his work on portfolio construction. Modern portfolio theory, or MPT, is a method for constructing optimally diversified portfolios
0:47.3	that maximize the expected return for a given level of risk. Risk in MPT is measured by volatility, specifically
0:58.8	standard deviation. How much does it give an asset or portfolio deviate from the expected return?
1:06.0	In order to construct a portfolio using MPT and I did this for years as an institutional investment advisor. We need an expected
1:15.2	return for each asset class. We need an expected volatility as measured by standard
1:22.1	deviation and we need a level of correlation between the
1:26.0	asset types. To what extent do the different asset classes returns track each other? Do they go up and down by the same amount or do they move in
1:35.9	opposite directions? The optimal portfolio derived from MPT will fall along a risk return line, which is known as the efficient frontier.
1:47.0	What the model does is it will generate a series of portfolios with certain weights in each of the different asset classes.
1:54.0	It could be large cap stocks, small cap stocks, bonds,
1:58.0	any asset class can be included as long as we come up with an expect return,
2:02.0	a volatility, and a correlation.
2:05.4	And so the model generates these portfolios and the optimal ones lie along this risk
2:12.3	return line called the efficient frontier.
2:15.7	As an institutional advisor, I would run these studies,
2:18.9	I would meet with an endowment investment committee, we would talk about the different portfolio options
2:25.8	and look at what the weights were in the different asset classes.
2:29.8	Here's what I found.
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