Last Updated Aug 23, 2011 7:04 AM EDT
The power of modern portfolio theory will be demonstrated by following the performance of a "control" portfolio, with a traditional asset allocation of 60 percent equities and 40 percent fixed income over the period 26-year period, 1975-2010. This period was chosen because it's the longest for which we have data on the indexes used. Throughout this example, we'll keep the same 60 percent equity/40 percent fixed income allocation.
We will begin with the S&P 500 for the equity allocation and the Barclays Capital Intermediate Government/Credit Bond Index for the fixed income allocation.
First, we'll see how the portfolio performed if an investor had the patience to stay with this allocation from 1975 through 2010 and rebalanced annually. We then demonstrate how the portfolio's performance could have been made more efficient by increasing its diversification across asset classes. Let's see how the first portfolio looked.
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