I was reading a paper on Modern Portfolio Theory [MPT] yesterday, and I realized something so obvious that I am embarrassed that it did not occur to me before. In the paper (Modern Portfolio Theory, Part One), by Donald R. Chambers, who is the Walter E. Hanson/KPMG Professor of Finance at Lafayette College in Easton, Pennsylvania, the author was making some points about the role of bonds in an asset-allocated portfolio. He began with a description of asset allocation.
This is where I had my aha moment. Why should bonds be considered necessary to reduce beta and dampen portfolio volatility compared to the market, when other assets that have low beta can accomplish the same thing? For example, can't you achieve the same level of volatility with low-beta stocks? Looking only at volatility, I don't see any difference between a portfolio whose volatility has been reduced by adding bonds and a portfolio whose volatility has been reduced by holding low-beta stocks.
Source: Seeking Alpha
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Low Beta Stocks Are Like Bonds For Dividend Growth Investors
Posted by D4L | Wednesday, November 13, 2013 | ArticleLinks | 0 comments »________________________________________________________________
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