WHAT ARE THE BENEFITS AND DRAWBACKS OF AN EFFICIENT
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The main benefit of an efficient portfolio is its low volatility
risk for a given level of return. By selectively allocating a portfolio's
investments to a wide variety of asset classes and securities, an efficient
portfolio decreases risk. This process is called asset
By investing in assets whose performances are not highly
correlated with each other, an efficient portfolio performs well despite the ups
and downs of specific markets. The degree of volatility for each asset class
tends to remain the same over time, so even though investors cannot control the
markets, they can control their risk levels in relation to their returns.
Don't expect an efficient portfolio to beat the market, however.
There is no known way to select investments that consistently outperform all
other investments in all economic environments. At best, an efficient portfolio
will underperform its best asset class holdings while outperforming its worst
asset class holdings. However, the tradeoff is found in lower volatility. Like
the tortoise and hare, the aim is slow and steady to win the race.
Let's end the tutorial on Modern Portfolio Theory by
summing up our lessons.