A.I.M. Users Bulletin Board

[aptus]

Hello Tom and Karel,

The paper on Modern Portfolio Theory (MPT) is here:
http://www.automaticinvestor.com/articles/mpt.html

Basically I believe that if we AIM a sufficiently diversified set of stocks individually (i.e. one stock per AIM portfolio) we can invest in riskier stocks at the individual portfolio level (I call it the microscopic level) than we would normally be comfortable with.

This is because our overall portfolio (i.e. the sum of all our individual AIM managed portfolios) will be managed using MPT (the macroscopic level) and thus reduce our risk (back to where it falls within our comfort zone).

This means that if we choose a point on the Efficient Frontier (EF) for a given risk level, we can expect higher returns -- because the EF will be shifted upwards relative to the EF created by using the same stocks, but not managing them with AIM. Similarly if we choose a given expected return level on this shifted EF, we'll expect a reduced risk level (compared with the non-shifted EF).

The reason I like this idea is that AIM's strength is aimed at managing risk for individual portfolios (i.e. on a stock or a basket of similar stocks). AIM doesn't do anything about overall portfolio management. Whereas MPT deals with overall portfolio management (i.e. Asset Allocation). This makes AIM and MPT natural partners in anyone's investment plan.

Later this year AI 2.0 will include some features that will allow easier use of AI with MPT.

Please let me know if you have any questions on this.

Thanks,
Mark.

http://www.automaticinvestor.com