Lesson 39 Taking the Right Amount of Risk
One of the most important advances in modern financial theory goes by the unlikely name of Tobin’s Separation Theorem. It greatly simplifies the way you should think about investing, and directly affects the problem of retirement planning. Starting with the idea that somewhere out there is a perfect equity portfolio, you must assume that anybody in the world who wanted a risky portfolio would want that portfolio. It’s the one with the highest possible return per unit of risk out of the infinite portfolios we could possibly construct. We refer to that as the Super Efficient Portfolio.
Then you must recognize that not all investors will want exactly that amount of risk and, additionally, they have ...
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