CFA Curriculum Type of Blog Post: Reward vs Risk

Jul 02, 2014

When you study finance, you have to first learn the basic fundamentals of portfolio theory. When you eventually move to real life, you quickly realize how theory is only a starting point. Nevertheless, it is useful to know the "book theory" because it provides something of a very basic framework. That said, in the words of the great investor Mike Tyson "Everyone has a plan 'till they get punched in the mouth." First, here is the look of a list of ETFs that climb up the risk curve.



Note that this was posted on this given date covering this very specific time period. Using those precise assumptions, the book theory held up nearly perfectly -- a line going from lower left to upper right --- more return for more risk. But you have to remember --- that was using some very careful selections. Here is an example of a different time period where equity investors were punched in the mouth, Tyson-style:


The point is that the volatile ETFs that are towards the right side of the chart will be the ones to have large intermediate-term drawdowns and large intermediate-term returns.     The ETFs on the left side will have low drawdowns and low returns.     These are very generic ETFs.    Where this gets much more interesting is when you use other ETFs that track more interesting indices.


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