AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 4/26/2006 Subject: portfolio anaylsis
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Followup To
Question - Thank you for your timely response. I am aware that the Beta measures risk, I having difficulty wording this but what I was trying to ask is, how do I determine what percent to invest into each fund to get the two uncorrelated funds to equal at least the risk free rate, especially when one of the fund's beta is negative. Do I invest nothing into that fund?
How do I calculate portfolio risk of a two asset portfolio. Asset A has return of 11% with beta of 1.5 and Asset B has return of 5% with beta of -.20. The risk free rate equals 4%.
Thanks,
Answer -
"Risk" is a generic term. What specific measurement of risk are you trying to calculate? Beta itself is a measurement of risk in that it defines the price movement of a security relative to the benchmark it is being compared to. In your example, Asset A's price moves 1 1/2 times more than the benchmark it is being compared to while Asset B withe a negative beta moves in an opposite direction of it's benchmark.
Answer It sounds like you are trying to optimize these 2 assets? If this is the case, then you should assign each of them a % weighting and then caculate the weighted return and beta to come up with the allocation that gives you the highest return with the least risk. For example, investing 50% in each will give you an average return of 8% with a beta of .65. 11% * .5 + 5% *.5 = 8%, 1.5 * .5 + -.20 * .5 = .65. I would use increments of 10% as my starting point (ex 90% A, 10% B; 80% A, 20% B, etc) I hope this helps answer your question.
