Chapter 15. Putting It All Together: Value Timing

Modern portfolio theory developments over the last 30 years provide a framework for addressing the way an investment’s risk should affect its expected returns. One powerful implication of the capital asset pricing model (CAPM) is that the market portfolio is on the efficient frontier. Thus, an individual who buys the market has an efficient portfolio producing an average risk-and-return profile. The market portfolio also measures the weighted average of all market participants’ individual allocations—this is another powerful implication because it means, collectively, all the world asset-allocation plans cannot deliver a return higher than that of the world portfolio in any one year or over the ...

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