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Stocks Versus Bonds and Something About Precision Weapons
Utility theory is meant to represent someone’s tolerance for risk.
—JPP
WE’VE JUST DISCUSSED WHY WE SHOULD NOT GIVE UP ON asset classes. Though the debate on asset classes versus risk factors is relatively recent, the perennial, most fundamental debate in asset allocation is on stocks versus bonds. How much should an investor allocate to each asset class? This decision, more than any other portfolio construction decision, drives the risk level in investors’ portfolios. Ultimately, it drives outcomes with respect to an individual investor’s retirement security (or lack thereof) or ability to meet any kind of liability. It is, without a doubt, the most important portfolio construction ...
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